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BTC steadies at $46k after flash crash

  • El Salvador officially approved Bitcoin as legal tender.
  • El Salvador’s government bought up 400 Bitcoins during the Asian trading session. They purchased another 150 bitcoins during yesterday’s crash.
  • The Bitcoin wallet app Chivo had to be unplugged during intraday trading while server capacity was increased.
  • Nearly $3.5 bln in long positions was liquidated over the past 24 hours, according to ByBt Liquidation Tracking.
  • Top exchanges (Coinbase, Gemini, Kraken, Binance) reported intermittent downtime and degraded trading during the bloodbath.

El Salvador’s big day morphed into a crypto "Black Tuesday". During the Asian session, the Bitcoin price rose to $52,920. The crypto market was optimistic about the official adoption of Bitcoin as legal tender in El Salvador. President Nayib Bukele tweeted that his government bought 400 BTC in two transactions.

Everything was going pretty well until pressure started to build after the European trading session opened. We attribute this to the flight from risk-sensitive assets in the FX market. The dollar rally was triggered by a sharp pullback in the Australian currency after the RBA meeting. Investors were unimpressed that the RBA extended its bond purchase program until February 2022. After the European session, risk aversion spread to other markets, including cryptocurrency. Gold, oil, European and US equities also took a hit.  

The cryptocurrency market reacted with a flash crash and a decline of $10k per BTC. On the Binance exchange, the price plunged by 12% or $5,898 in just 11 minutes. The decline was $10,076 (-19.04%) from the Asian high of $52,920. Ether, in turn, tanked 24% to $3,000.

Nayib Bukele snapped up 150 BTC during the crash. Bukele said that $225 mln was allocated for the experiment. To incentivize Salvadorans to use BTC, the government offered $30 of credit to those who download the app and use Chivo. Notably, the government maintains a large amount of cash in case bitcoin is redeemed when it depreciates. We assume that the El Salvador government is not overly concerned about yesterday. Buy in parts, so it works out to an average.

Nothing has changed since 2018. Flash crashes still cause cascading execution of stops on aggressively leveraged futures, with exchanges freezing and going offline. Traders complained about problems in accessing Coinbase, Gemini, Kraken and Binance. One of the most resilient trading platforms in the industry against such flash crashes is FTX. According to traders, it ran smoothly during the crash in May and this time around as well.

FTX CEO Sam Bankman-Fried told Blockworks that in recent years they have devoted a considerable amount of time to making the reconciliation mechanism scalable and parallelizable, while maintaining a cross margin that enables the exchange to withstand a heavy workload.

Almost $3.5 bln in long positions was liquidated over the past 24 hours, according to ByBt Liquidation Tracking, of which $2.6 bln wiped out during the first four hours of the North American trading. Other top altcoins were also heavily impacted by the Bitcoin crash.

After dropping to $42,843, price action bounced back 12% to $47,926. By the time of writing, BTC was trading at $46,094. If the market plays out under the same scenario as in May after Tesla's statements, the price was locked in a sideways trend for about 2-3 days in the wake of the collapse. Buyers licked their wounds, but due to high volatility, sellers, who unsuccessfully entered the market with big slippage, also took a hit.

This is what it means to grow on falling volumes. Flight from risk assets was triggered in global markets, and the main servers of crypto exchanges are still not ready for heavy trading. Volatility spiked exponentially, so for the next day we expect to see a trading range of $44,000-47,500.

Based on the above, several reasons for the flash crash in BTC can be singled out. We list them in order, as we see it.

  • Risk aversion broke out in the aussie dollar after the RBA meeting.
  • A broad-based dollar rally alongside an increase in US 10-year Treasury yields.
  • Gold, oil and equity markets came under pressure.
  • Temporary shutdown of the Chivo wallet.
  • Profit-taking broke out after the El Salvador government bought 400 bitcoins, after which selling momentum picked up.
  • Cascading execution of stops on long positions and freezing of exchanges. Orders could not be executed, causing order books to be emptied and major slippage.

Part of the reason was likely more due to a downturn in conventional markets, and traders liquidating positions in crypto in order to square some positions in the equity market.

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