Last Weekend’s Crypto Flash-Crash Was A Feature, Not A Bug

Over the past year I’ve written (OK, complained) about how the 24/7 trading in cryptocurrencies can upend the weekends for those of us who prefer to end the trading week on Friday afternoon. I’m sure that many of you were equally thrilled to see news alerts on Saturday about a 17% flash crash in bitcoin and other cryptos. I say that sarcastically – I don’t wish any harm upon crypto investors – but because I prefer to clear my head from Friday afternoon until Sunday evening when Australasian markets reopen.No such luck last weekend.

I wish I could say that this was an isolated event, unlikely to be repeated. But it’s not. It’s happened before and it is likely to happen again. Those of you who trade or invest in cryptocurrencies need to be cognizant of the circumstances that allow this to occur.

First, let’s take a look at the action in Bitcoin and Ethereum over the past 7 days:

7 Day Intraday Bitcoin (white) and Ethereum (blue) vs. US Dollar

(Click on image to enlarge)

7 Day Intraday Bitcoin (white) and Ethereum (blue) vs. US Dollar

Source: Bloomberg

We see the drop occur just after midnight (EST) on Saturday morning. Even though it would have been prime time in much of Asia, it is reasonable to expect that liquidity late on a Friday night/early Saturday morning would be impaired relative to normal business hours.[i]Now consider that there are crypto platforms that allow their customers to lever their positions 20x or more. If a trader is leveraged 20:1 (by putting up only 5% margin), it clearly doesn’t take much of a move to force either a margin call or an automated closeout. Bear in mind that prior to this weekend, Bloomberg data showed that the 20-day historical volatility of bitcoin was about 53. Consider also that that historical volatility is calculated on a “close to close” basis. While “close” is a meaningless term in a 24/7 market, it works as a concept if it is calculated from the same time each day. It is highly reasonable to expect that the daily range is something greater than shown by two data points at an arbitrary time.

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Trading in digital assets, including cryptocurrencies, is especially risky and is only for individuals with a high risk tolerance and the financial ability to ...

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