Another Weekend, Another Flash Crash…

It is fascinating to watch the evolution of the crypto market, particularly that of Bitcoin. On the one hand, we see the market maturing as more people opt to trade intelligently, using algorithmic routing technology that seeks to trade at the best price without impacting the market. At CoinRoutes, we see this quite strongly, as our clients traded over $430 million in notional value through our systems in July. On the other hand, we see events such as depicted in the graph above, which happened on Saturday evening EST on August 2nd.

While I dont know for sure what happened, our working hypothesis is that someone (or multiple someones) created a large long position in Bitcoin and/or Ethereum, hedged against perpetual swaps (traded on markets outside the U.S.) and unwound their position by dumping on the spot markets while placing limit orders to buy at dramatically lower prices in the perpetuals market. When the perpetuals market liquidated all of the long positions that built up, those buy limit orders were likely filled at a very large profit for the perpetrators.

The facts of the situation are:

1) Over the past week there were many more speculative long positions established than short. This was shown by the very large funding cost for long margin.

2) The selling event was either purposeful or insanely dumb, as it was done very loudly at the least liquid time of the week.

3) Forced liquidations caused the final wash out low to be lower for the perpetual exchanges than the spot exchanges.

I will leave it to my readers to decide if this was all a coincidence, but stupidity in the markets is decreasing as more traders become aware of tools such as CoinRoutes for managing market impact…

It will be interesting to watch the market reaction to events such as this, as excessive volatility is often cited as a reason why “institutions” are not investing in Bitcoin. The fact that the market has traded the past 10 days with relatively low volatility and at prices that have recovered most of the loss is certainly constructive.

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