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Crypto Flash Crash: What Caused Friday’s Crash
Billions of dollars in value evaporated in a matter of hours on Friday.
THE cryptocurrency market suffered an absolute collapse at 8:30 am ET on Friday after the stock market opened. Bitcoin (Bitcoin -1.03%) fell more than $4,000 to $66,440 as of 3:15 p.m. ET, Ethereum (ET 1.16 % ) fell 9 % over the same period to $ 3,216, and Dogemoneta (DOGE 0.23%) fell by 14.2%.
While the decline began early on Friday, it accelerated around noon ET, which is when small declines turned into double-digit losses for many cryptocurrencies.
There was no major news from the cryptocurrency world today, but this type of volatility can often hit at the end of the week or on the weekend. And for the first time in a long time, this is what we have today.
A bad week for cryptocurrencies
There hasn’t been much good news for cryptocurrencies this week. Higher-than-expected inflation reported earlier this week caused a rise in interest rates and a decline in technology and growth stocks, all of which are traditionally correlated with falling cryptocurrency values. It just took a little while for the market to process the news.
We have also asked the U.S. Securities and Exchange Commission (SEC) to issue a warning to Wells Uniswap, which is a precursor to the cryptocurrency lawsuit. The market has fought for clarity on what is legal and what is not, but the SEC has chosen legal action against high-profile counterparties such as XRP AND Coinbase. Yet the SEC also lost most of those battles, so it’s unclear what the outcome of the latest ones will be.
Given the lack of regulatory clarity, it is not surprising that some investors have chosen to take profits at market peaks.
Liquidations cause a rout on Friday
When a crash begins, it can be accelerated by leverage in the cryptocurrency market. Not only do traders have leveraged positions, but liquidity can also decline as the week ends, which may have exacerbated the situation on Friday.
According to Coinglass.com, $668 million in long positions were liquidated in the last four hours alone. Liquidations are not uncommon, but they are normally limited to a few hundred million dollars a day, not that level in a few hours.
What is unique about this incident is its scale. Not only are Bitcoin, Ethereum and Dogecoin falling, but the smaller tokens are falling much more.
Volatility and week ahead
The cryptocurrency market has always been volatile, but this is an abnormally large drop. It’s unclear what will stop him.
In recent months, the market has benefited from billions of dollars in inflows into Bitcoin ETFs, leading speculators to lead the way and use leverage to amplify moves. That’s great on the way up, but if the trend reverses, it could be terrible for cryptocurrency values.
I am cautious about short-term price movements cryptocurrency because I think investors will look for safer investments as interest rates rise and earnings season begins. But this weekend could be the start of a particularly volatile period for the sector.
Travis Hoium has positions in Coinbase Global and Ethereum. The Motley Fool has positions and recommends Bitcoin, Coinbase Global, Ethereum, Uniswap Protocol Token, and XRP. The Motley Fool has a disclosure policy.