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BTC flash crash

Bitcoin experienced one of the worst single-day declines in recent times as the price plummeted by more than $1000 from $9700 to $8500 in a flash. After having reached a yearly high of $14k in June, BTC has been in a consolidation phase since then with price very much oscillating between $9500 and $12000. 

The primary reason behind the selloff is anyone’s guess but the factors that triggered it could be a combination of a sudden fall in BTC’s hash rate, the US Fed’s decision to inject more funds into the economy, and margin calls and liquidations on derivatives exchanges such as BitMEX that perhaps exacerbated the price decline. 

Although price does not necessarily follow hash rate and hash rate fluctuations are common, an astounding 40% drop in hash rate is a concern that cannot be overlooked. BTC’s hash rate has been on an upwards trend throughout the year, reaching a new high of 100 EH/s last week. A drop of this size perhaps indicates that a big miner pulled out of the mining pool all of a sudden for reasons we don’t know yet. 

Whatever is the trigger behind the selloff, margin calls and liquidations on derivatives exchanges had a big role to play in aggravating the price decline further. A small fall in price triggers liquidations for high-leverage orders, which leads to exchanges selling more BTC to prevent counterparty risk, which then puts more downward pressure on the price and turns into a vicious spiral in which more positions are liquidated and sold. 

Yesterday’s liquidations on BitMEX were so pronounced that they amounted to over $600 million in a span of two hours, which translates to roughly 6% of long liquidations since the beginning of this year. Hourly trading volume peaked to a record high of $1.5 Bn, about 10 times more than the usual average of $100 – $150 million per hour. 

Remember CDO-Squares and synthetic CDOs from circa 2008, and their impact on the overall financial system? Crypto derivatives might yet be deja vu all over again.

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