BTC Price “Flash Crash”- Manipulation or Growing Pains?

While Bitcoin is certainly notorious for its volatility, there has been much speculation among Bitcoin community members, financial experts and the general public regarding the latest price drop. The forums have been abuzz with rumors ranging from margin trading to an NSA plot to take over Bitcoin. 

As it happened

The price dipped into the low US$440’s, while the price at the BTC-e exchange hit a low of US$309, and even though the price soon recovered in line with other exchanges, the short time window allowed some lucky buyers to acquire reasonable quantities under US$350 per coin.

Many believe that the culprit was BitFinex with its large number of sell order that caused the freefall in price. BitFinex makes it possible for individuals to trade on leverage. In other words, users can borrow money to trade with. This feature was certainly popular with many BitFinex users who were using it to go “long” on Bitcoin. Thus, they were betting borrowed money that Bitcoin’s price would go up to increase the potential windfall.

When the price was falling, BitFinex forcebily closed users’ positions so they can sell the user’s BTC as collateral for their leveraged trading. This resulted in a margin call. The force closing of positions pushed the price lower, creating a positive feedback loop resulting in the subsequent force closing of more user positions. This is essentially why we saw the price plummet by almost US$100 on BitFinex in less than 15 minutes.

You can read the detailed response regarding the price drop from Josh Rossi of BiFinex here.

Of course, this could have been just a coincidence, but it may have been a calculated move to manipulate the price. Most markets (Bitcoin included) are driven in the short-term by imbalances between the transaction parties and some of these imbalances are purely coincidental.

Community Response

To gauge the sentiments around the community regarding this event, the Cointelegraph asked the following question on the Facebook page of its General Manager, Maria Jones: 

What do you think of the recent BTC price "flash crash" and what is behind it in your opinion? 

Paul Snow (President, Texas Bitcoin Association):

“The flash crash was a result of automated trading on BTC-e.  The pattern seems to suggest it was a result of automated trading ‘gone wild.’  Some investors lost quite a bit of money, while others gained.  This is possible largely because of the still small size of Bitcoin's capitalization relative to the number of people very interested in the technology. I expect that as Bitcoin's market value continues to grow, the chances of such flash crashes will diminish.  Regardless, the value for using Bitcoin both as a currency and as a cryptographic ledger for business processes will continue to grow.”

David Duccini