An $ETH Flash Crash
An event grabbed my attention this week. Ethereum experienced a flash crash and the price dived to USD13 very briefly, stunning the Crypto community. Equally stunning was its rapid correction to over USD100. This resulted in some very unhappy investors. Some investors panicked or had stop loss orders that were were filled at just over USD13. Conversely, there were some very happy ones whose buy orders were filled right down to $13. Some of them would have made a profit of up to 770% in just a few minutes.
Not just Crypto
This has happened twice now to Ethereum, the previous time being in June of last year. However, this sort of occurrence is not limited to the Crypto markets. There have been many celebrated flash crashes over the years. One occurred on May 6, 2010 which wiped a whopping 1000 points off the Dow Jones Industrial Average. The Euro, normally sluggish in the markets, took a dive suddenly on January 15, 2015. Then there was a British pound flash crash on October 7, 2016 when the pound fell 6% against the USD in 2 minutes
The reasons behind such massive price drops vary. Technology, politics, uncertainty and even natural disasters can contribute. In the case of the Dow Jones a rogue trader caused the flash crash with spoofing algorithms. In other cases, they blame fat-finger trading errors, when a trader accidentally puts in a much larger trade than expected, in the heat of the moment. in this case when fears of a hard-Brexit were already causing a run on the pound. The Euro’s flash crash occurred when the Swiss National Bank (SNB) suddenly and uncharacteristically abandoned its cap on the CHF’S value versus the EUR.
It bankrupted many FX brokers and it wiped trillions of dollars from the financial markets within minutes of the crash.
Stable Markets are not Immune
The point I’d like to make here is that the majority of these events have occurred fairly randomly to some of the most respected, stable markets in the world. Cryptocurrency does not stand out as more vulnerable to unforeseen crashes than any other market – nor to predictable ones either. Arguably the current downturn in the crypto markets are no more exceptional than other bear markets.
Some analysts are forecasting a very volatile period ahead that may even eclipse the infamous Black Friday stock market crash of October 1987 (on Friday 13th!). Maybe even the Global Financial Crisis precipitated by the Lehman Brothers collapse in 2008. These times are when traders make, and lose, most money. However, panic drives these the crashes as much as underlying economic factors. They often follow speculative stock (and now crypto) market bubbles. The meteoric rise of Bitcoin to nearly $20,000 is a classic example of such a bubble.
The Surfer Analogy
So how can getting caught up in a crash be avoided by investors? When there is a crash there has usually been a string of indicators resulting in an event that some analysts will have forewarned. Trading the markets when they are on a roll is like a surfer riding ever higher waves. That’s what gives a surfer a thrill. For traders, it’s what gives them ever growing returns. However, when the wave crashes it can be a dangerous place if the surfer is in the wrong position. Likewise for traders if they have not picked their moment to exit.
Be Careful Where You Surf
Anybody trading Crypto, or investing in ICO’s, should equip themselves with the right tools to ensure they are on the right side of the waves as they crash. Picking the right wave to ride is equally important. Causality’s recently launched Crypto Sentiment Alerts gives the trader a distinct advantage in this respect.
Also published on Medium.