A flash crash is a rapid decline in the value of a crypto asset or stock within an extremely short period of time, usually followed by a rapid recovery within the same trading day. Whales and high-frequency trading firms with huge volumes in the asset market are largely blamed for flash crashes.
Key characteristics of a flash crash include:
- Rapid Price Declines
Prices experience a sharp and sudden drop, leading to significant decline in value
- Limited Duration
Typically occur within a single trading day and last only a for short duration (minutes to a few hours)
- Quick Recovery
After the initial plunge, prices quickly recover, often returning to levels close to where they were before the crash
- Electronic Trading Impact
Flash crashes are often associated with electronic or algorithmic trading, where computer programs automatically execute trades based on predetermined criteria
- Market Manipulation
Flash crashes can be triggered by heavy selling of large amounts of assets
Known Flash Crashes
One of the best examples of a Flash Crash in the traditional financial market happened in 2010 (known as the "crash of 2:45") when the US stock market crashed quickly and recovered most of its value the next day. The cryptocurrency market is prone to flash crashes due to it's still unregulated nature and low liquidity of certain assets. A major crash occurred in June 2011. At the time price monitoring websites such as CoinmarketCap, CoinGecko and popular exchanges like Coinbase, Binance etc. weren't around to facilitate the buying and selling of digital assets. The then popular Mt. Gox exchange was hacked, resulting in a 99.9% short-term drop in the BTC price.
Flash crash dynamics
The decentralised nature of these markets, coupled with the prevalence of algorithmic trading, often increases the speed and magnitude of crashes. Unlike traditional markets, where brokers can halt trading during extreme volatility to increase control, cryptocurrency exchanges rarely have such mechanisms due to the decentralised, peer-to-peer nature of the blockchain.
The causes of flash crashes in blockchain are diverse. Reasons can be large-scale automated sell orders executed by bot trading, panic selling by investors in response to sudden market changes, or even rumours and speculation affecting the market sentiment. The consequences of such crashes result in significant financial losses and raise questions about market stability and the effectiveness of current regulatory frameworks.