What is Flash Crash?
Human-derived faults often cause incredible phenomena in the property market. However, this is not just a human fault – some software bugs are even known to have a big impact. And in the crypto market, it is called Flash Crash.
A Flash Crash is a burst, deep discount and then quickly reinstates the original level in seconds or minutes. More specifically, they occur without any particular reason, meaning that it is difficult to determine why a sharp decline suddenly happens.
Unlike the usual ascending and descending price movements that can be found in the charts, Flash Crash is a fall that exceeds the statistical value in minutes and the price is almost completely reversed without a sign of recovery. In general, this is only possible for assets with small transaction volume and unexpected occurrences. The depth will depend on the market that it happens. Although the usual decline can show a certain recovery, the prices do not always revive quickly.
Background of the market
The cryptocurrency market is still in the building process. The market capitalization of the entire system is only about $ 120 billion, while Apple’s alone is more than $ 800 billion. The lower the market capitalization is, the greater the volatility becomes. If an exchange shows signs of low liquidity, the possibility of Flash Crash will increase.
Before we find out how these sudden declines can occur, it is important for us to understand what is liquidity. This is the ability to convert the currency you purchased on the exchange into fiat currency, USDT, BTC or other cryptocurrencies. The higher the liquidity is, the faster and better the operation of the price line becomes. Low liquidity platforms make it harder to sell these assets, with the unbalance between buying and selling prices increasing.
What causes Flash Crash?
There are several theories about what might cause Flash Crash.
1) Fat Finger phenomenon
Ethereum – June 21, 2017 – From opening candles at $ 352.45 to closing candles at the lowest of $ 13.88.
A Flash Crash depends on the liquidity of the exchange, where users try to sell a significant amount of money. For example, when Market Orders (sell at market price) sell 10 million Ether, then the orders will match the entire Order Book. Thus, Ether will be sold at a price much lower than the original price. Because it could happen suddenly, hence the name Fat Finger.
On April 23, 2019, the phenomenon happened again on the world’s largest exchange, Binance, which you can see above chart.
2) Domino effect
This is another theory which is some people consider it a simple market phenomenon. The Domino effect may causes hundreds of Stop orders, Stop-loss and Margin orders. When the price drops suddenly, these orders will be matched in a great quantity, creating a great demand that pushes the price lower than it can recover.
There are other similar actions that can cause unexpected problems like Flash Crash.
Price manipulation
A price manipulation plan refers to manipulating the value of a currency with the purpose of creating panic, and then they may buy assets at a cheaper price. For example, a large sell order will be placed and the price will suddenly drop by 10% to 20%, and then succeeding in attracting people’s attention is the most important. After that, the money from the account is used to execute a number of Limit Orders that are visible in the Order Book, showing the ceiling price sale to other traders. Therefore, traders recognize that the asset is down 20% in value.
To reverse the situation, the manipulator will first have to make a sell wall to continue the trend and other traders will sell in panic. In other words, this Domino effect is created for frightened users to continue to sell at low prices, while the manipulator places virtual orders which are never matched, because when the price reaches the order point, it will match and be canceled again. When the attacker finds that the price has reached the desired number, he places a large buying order, eliminates the sell walls to reverse the trend, and buys them at the desired price.
Who is the culprit?
The question is: can a user create Flash Crash? It seems that “Whale” investors will be able to do it, because they have enough money to exert enough impact. First of all, the effect on the market depends on all participants. A user can activate the effect, but the final result will depend on how the rest of the market responds.
As mentioned above, Flash Crash often happens, because the lack of liquidity makes the plan is easier to implement. However, in order to create a massive drop and a near-instant recovery, Flash Crash needs to happen with more difficult-to-manipulate cryptocurrencies. Typically the top 20 cryptocurrencies, in which an unexpected fall will attract the attention of a large audience. In the case that the most vulnerable currencies with lower market capitalization, it is likely that no one will react and wants to buy them if a sharp decline occurs.
Therefore, the currency needs to be well-known and ranked at the top of the charts. Having a low circulating supply will also increase the possibility of being manipulated, as this increases liquidity and reduces volume.
It is remarkable that in some cases, the exchanges have been blamed that they caused Flash Crash, whether inadvertently or in other ways.
Monero is a typical example
Monero cryptocurrency – December 21, 2017 – From opening candles at $ 420.27 to closing candles at the lowest of $ 151.26.
Monero, a project as old as Bitcoin, has experienced a Flash Crash in the past. The account that caused Flash Crash, with only about 16.5 million coins in circulation, had wide approval from miners and generated $ 59 million in 24-hour trading volume. Over the past few years, many small Flash Crash incidents can be seen in the chart. The most important event happened in December 2017, when XMR fell from about $ 400 to $ 150, so it is easy to see that XMR (the Monero currency), is easily a target for Flash Crash events.
How to fight back Flash Crash
In the general property market, after the Dow Jones’ Flash Crash incident, the person who was arrested and charged with evidence of market manipulation. Specialist teams then reviewed suspicious price movements that were put into operation. However, organizations like the SEC likely does not control the cryptocurrency system, unless they find the cryptocurrency to fit the definition of a security. At present, the exchanges should continue to focus on security and make simple rules to avoid Flash Crash as well as anti-inflating prices to stabilize the market. It will help attract more users to join the platform.
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