Bitcoin’s Sunday morning flash crash was initially attributed by some to so-called “whales” who control large amounts of bitcoin moving the market, however others have now suggested it could be due to “algo misbehavior.”
“Such spikes are still inherent to the crypto market structure, with prolific unregulated leveraged trading going on,” Anatoliy Knyazev, the chief executive of brokerage Exante, said via email, adding the flash crash “could be a case of an algo misbehavior.”
Algorithmic trading is used to automate trades based on time, price, and volume with traders programming buy or sell orders to happen when certain market conditions are met, such as an asset price reaching a particular level or if it sharply falls.
The effects of algorithmic trading can be exacerbated by leveraged trading, allowing traders to take larger positions with smaller amounts of capital—something that is now being offered by many of the biggest bitcoin and cryptocurrency exchanges.
“There’s a lot more leverage now than ever before, especially in crypto,” Mati Greenspan, the founder of Quantum Economics told subscribers of his markets newsletter.
“This could lead to some extreme volatility,” Greenspan wrote, but added he thinks “bitcoin, along with the rest of the digital asset market, is in a bull market right now.”
The bitcoin price has shot up by more than 20% over the last month, climbing to levels not seen since August last year.
Meanwhile, it’s also been suggested the sharp Sunday morning downturn was due to market participants “profit-taking.”
“Bitcoin has been increasing, and on Sunday morning the first digital currency touched $12,000,” Alex Kuptsikevich, senior financial analyst at FxPro, said via email.
“However, due to the wave of profit-taking, it quickly corrected to $11,000. Taking into account the relatively low liquidity of the crypto market, a small number of large orders is capable of launching waves in both directions.”