On October 21st, 2021, crypto exchange Binance US experienced a Bitcoin flash crash to led BTC’s price to dropped by over 80%. The industry is maturing, but these occurrences reminiscent the times when a crypto flash was business as usual.
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What caused the crash? A fat finger by someone meaning to place a limit sell order at $82,000? An engine error? A Combination? Binance has stated that it was caused by a bid in the trading algorithm of one of the institutional traders on the exchange.This entity created a domino effect which wrack havoc across all Bitcoin exchange platforms. The research claims that the price of BTC dropped $1,000 as a result of this bug.
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As seen below, the event extended to 11:35:06 with the Kraken discount stabilizing around this period. Arcane Research pointed out that this exchange operates with less efficiency during volatile markets.Bitcoin Down The Trading Rabbit Hole
Brett Harrison, President of crypto exchange FTX US, commented on the event. He explained the different trading orders and how they operate when Bitcoin increases its volatility levels. In this case, the price of BTC trended to the downside reducing the liquidity in the market as it moved further down. Harrison said:Those trade prices will trigger stop loss or take profit orders, which themselves are market orders and will cause even more liquidity to be taken. The combination of market orders and lack of liquidity cause the price to spiral downwards in an extremely quick fashion.Harrison clarified that the Binance US Bitcoin crashed was caused by an institution setting a large number of market orders that “cleared the bid side” for the BTC/USD trading pair order book. This triggered a liquidation cascade while BTC’s dropped in the platform. FTX president used the U.S. futures market to exemplify a different market that used to suffered from this problem until it implemented “guardrails”. This could “help prevent short term microstructure issues”.
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The implementation of these types of solutions, in combination with others, could help bring more “maturity” into the crypto market, the executive claimed.18/BTC/USD dropping as much as it did on some exchanges was not reflective of an actual move in the fair price of Bitcoin, it was a temporary dislocation due to exchange dynamics. Price bands, volatility pauses, and auctions can help prevent this situation reaching such extremes. — Brett Harrison (@BrettHarrison88)At the time of writing, BTC trades at $60,412 with a 4.5% loss in the daily chart.