Last week Bitcoin, the heavy touted and highly scrutinized crypto bellwether experienced a flash crash on the order of 17%. Or $100 billion in lost value to investors in less than an hour. From $52,900 to $42,900 in the blink of an eye (see the chart below). A devastating drop with no follow-through selling. But most of the losses remained.
A flash crash by definition is a very rapid, deep, and volatile fall in security prices occurring within a very short time period. The Bitcoin plunge surely qualifies. As a veteran of the ’87, ’89, 2000, and 2008 crashes, I struggle with new nomenclature to parse old ideas. With age, I have grown accustomed to the familiar. Set in my ways so to speak. A crash, is a crash, is a crash. Not enough buyers. Too many sellers.
In a very traditional view, any market caught in the throws of lightening fast panic selling suffers from a lack of robustness. Not enough buyers or those willing to make a bid to stabilize the market when the cow manure hits the rotating oscillator. For veterans of the trading pit days, we understand the concept of a thinly bid market and highly speculative creations like Bitcoin.
With the Bitcoin wounds still fresh, media narratives sought to color events. What caused the crash? “Traders booking profits from the euphoria over El Salvador adopting bitcoin as a national currency. ” “Or the SEC investigating Coinbase Global Inc.” “Or glitches in the rollout of the El Salvador Bitcoin adoption.” Stretching creditably and reality to extremes, proponents called the flash crash, just a “healthy” pull-back.
For the more inquisitive of us, the takeaway from the $100 billion dollar debacle was dirt simple. Highly speculative and thinly bid markets are fraught with danger. Losses can and will be dramatic, account-ending, and soul-ripping. Therefore, “caveat emptor.” Buyer beware.
Expect more volatility no matter how successful Bitcoin proves to be in the end.