Why the Crypto Flash Crash?

After months of an increasingly quiet market, crypto has experienced a Flash Crash.

From nowhere, the market collapsed through the previously considered rock-solid support level of $6000 for Bitcoin. I suspect in minutes, stop-loss orders flooded the exchanges. Within a few hours, a quiet market was in freefall.

1700 Wed 14 Nov, Bitcoin was happily trending at $6,350

2300 Wed 14 Nov, price drops to $6250 [who cares]

0100 Thur 15 Nov price collapses to $5780 [breaking countless support levels]

0500 Thur 15 Nov price down to $5560 [10% drop]

Bitcoin gets a cold and the Altcoins get influenza, with some down 20%.

Why did this happen?

The big news was obviously the fork in Bitcoin Cash on 15 November. An all-out war between BCH ABC [the core Bitcoin Cash] and BCH-SV [Satoshi’s Vision].

Should that alone be responsible for a market flash crash? Of course not.

I think the only thing this fork has done is sign the death warrant on this currency. You cannot trust it as a stable payment system, influenced by different leaders with differing visions. I know people like it, however having been in the ‘reserve currency space’, my opinion would be to sell it.

Ed’s Theory — The Flash Crash was an ‘Ambush.’

Market volumes have collapsed recently. Forget the claim that volumes were cruising at $10–15 billion per day — Binance’s volumes were off by 60%. There was no positive news to move the market. Volatility was dropping. The market was going to sleep.

Also, we must remember that the majority of the crypto market volume, given that there is minimal new investor cash, it is driven by Retail Traders operating on crazy margin trading leverage. 20X plus. So, if prices drop fast, their stop losses are hit and selling happens on steroids. It’s a classic flash crash.

Because of this, I believe a consortium of whale traders decided to pick the perfect time to smash the market. My guess is that they worked it out to the hour! A classic ambush. Smash a sleeping market at the right time, the way no-one expects, that triggers big stop losses.

To explain, what happens is a group of traders with big leverage i.e. with 50X on $20 million worth of BTC, can sell $1 billion of Bitcoin on exchanges. They hit all prices. Prices start trading so low i.e. 2–3% below the range, (which is easy for a good trader to work out) then all the stop losses are triggered.

So if you were a trader and you had bought $1 million BTC at 20X leverage on your $50k of equity; if the market drops 2%, you have lost 40% of your equity so you must sell $1 million at any price to get out. Buyers are now sellers and there are no buyers, so the price collapses 10%. Countless leveraged traders are wiped out. Our friend with his $1 million trade, loses $100k or $50k more than his equity. He probably cannot put more cash into the market, so he is wiped out.

And our friends who sold $1 billion, buy again 10% lower as exchanges ‘close out’ the dying traders. 10% on $1 billion = $100 million, not bad for 12 hours work! 500% return on their equity.

What does this mean for crypto?

Some traders will have been wiped out and the exchanges who lent them cash will be in trouble.

Traders not caught in this ambush will be galvanised into action. Trader exchanges not caught in the ambush will be excited.

The negative press will make the public even more sceptical.

I doubt Institutions will be impacted at all.

If I can spot this ambush, you can be guaranteed the financial guys will be laughing at the audacity of it.

I suspect that the pitch of Bitcoin being $10,000 by Christmas has just died, unless those responsible for this Flash Crash do it another way.

What do you think?