Flash Crash

Understanding the Concept of Flash Crash

A flash crash is characterized by a sudden and substantial decline in the price of an asset within a short timeframe, followed by a rapid recovery to previous levels. This occurrence is frequently observed in the cryptocurrency market, where flash crashes can occur in a matter of hours or even minutes. High-frequency trading is the primary driver behind these catastrophic events in the crypto market.

Digital currencies are inherently volatile, and this volatility often leads to sharp downward movements in their prices. As a result, intense selling pressure can cause rapid shifts in crypto prices, giving rise to flash crashes in many cases.

Flash crashes are not exclusive to the cryptocurrency industry; they also occur in other sectors such as stocks and foreign exchange markets. Notable examples in the stock market include the July 2015 flash crash, which resulted in a trading halt on the New York Stock Exchange (NYSE) for over three hours. Additionally, the 2014 bond flash crash, caused by algorithmic trading programs, and the 2010 Dow crash triggered by spoofing are significant incidents in this regard.

Flash crashes in the crypto landscape have their own unique triggers. For example, in 2021, Bitcoin experienced a flash crash that wiped out approximately $310 billion from the digital currency market, leading to $10 billion worth of BTC liquidations.

This crash was a result of power blackouts in the Xinjiang region of China, where some of the world’s largest Bitcoin mining farms are located. The blackout caused a significant portion of Bitcoin’s network to go offline, resulting in a drop in mining activity from 215 to 120 exahash per second. This sudden decline in mining power triggered a massive sell-off, ultimately causing the flash crash.