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.

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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 (Executive Director, Vires in Numeris LLC):

“It's largely become a ‘self-sustaining downward cycle’ -- when investors get nervous they decide at some point to "lock in" whatever gains they are comfortable with. Personally I've been in the markets since BTC was around $2. Nothing has changed in the fundamentals - there will STILL only ever by 21M of them. Therefore, as far as I'm concerned, it’s all ‘on sale’ at the moment.”

Patrick Dugan (‎CIO at Crypto Currency Concepts):

“On Bitfinex, they allowed longs to have 350% exposure by using BTC as margin and then adding the derivative positions with leverage. Lots of folks were HODLing with leverage.These liquidations often result in long wicks at the bottom of red candles. ~26000 BTC could have been sold on Stamp and Bitfinex in one day, if they were really going to dump everything. The rest of the down-move has seen much larger volume and can be attributed to market reflexivity - but sure they could have sparked it off.”

Leroy Brown (Intern CEO, CoinEstate):

“Ethereum is dumping BTC for fiat. Their idea of multisig is fractual.”

Guido Dassori (Bitcoin Enthusiast):

“Summer discounts, last year it was ~50$.”

Will Pangman (CCO, Tapeke.com):

“…It's not a ‘crash’ at all.

“That's 100%. Moves up or down are opportunities regardless. Bitcoin 2.0 is gonna be epic!”

Sean Dion Turgeon (Bitcoin Enthusiast):

“Bitcoin is the yahoo, Dogecoin will be Google.”

Luke Parker (Coinoshphere):

“The summer stagnation itself was caused by all of the incredible spring merchant adoption, who are all now selling their new BTC on exchanges as soon as they receive them. So it was already a down environment and Bitfinex's big margin calls coming due in that were sure to cause havoc.”

Barry Goldwon (Customer Service Manager, Best Bitcoin Casino):

“I think it's just the one step backward before going three steps forward, and when Bitcoin does, we'll all be just as ecstatic as when its value skyrocketed to epic proportions before.”

Mark Jeffrey (Bitcoin Enthusiast):

“I think it's the flood of new big merchants now accepting Bitcoin and converting it immediately into fiat. Ironically Bitcoin's success is driving its price down -- for now. I don't think this period will last long.”

Megan Burton (Founder, CoinX):

“Summer slump - kids are out of school”

Chris Evans (Business Development Manager, Bitcoin Gambling Guide):

“Crash is a strong word indeed. A lot of the blame has been directed to BTC traders. This flash "crash" is something that the Coin has to go through in order to gain more speed in the future."

The last comment by Chris Evans seems to fall in line with recent price moves as the index seems to be in recovery.

CoinTelegraph would like to thank every community member sharing their thoughts with us.


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