Bitcoin Price Update - Aug 14 Flash Crash

When the price of any coin that we have listed falls or increases significantly, we will post a price update attempting to explain the causes and contributing factors of the price swing

Aug 14, 2014

Bitcoin Price falls from $530 to $451 on BitFinex.com in a matter of minutes at 4AM

BitFinex

This triggered a sell off on other exchanges. On Bitstamp, the price never fell below $503. On BTC-E, the price fell as low as $494 before rebounding.

Bitstamp

BTCE

Cause of Price Swing

It is believed that large sell orders on BitFinex pushed the price down quickly.

BitFinex allows individuals to trade on leverage, essentially borrowing money to trade with, and a lot of BitFinex users were using this feature to go “long” on Bitcoin. Essentially, they were betting that Bitcoin price would go up and they used borrowed money to increase the potential profit.

As the price was pushed lower, BitFinex force closed users’ positions because they needed to sell the user’s Bitcoin as collateral for their leveraged trading. This is called a margin call. As they forced closed users’ positions, it pushed the price lower, forcing closed more positions, basically creating a feedback loop. This resulted in the flash crash that brought the price down by almost $100 on BitFinex in less than 15 minutes.

This could have been a coincidence or could have been a calculated move to drive the price lower. The number of leveraged Bitcoin positions on Bitfinex is public information. Before this flash crash started, there were roughly $28M USD worth of leveraged Bitcoin positions betting on the Bitcoin price going up on BitFinex. Yesterday saw a substantial decrease in Bitcoin price, making those positions particularly vulnerable to a further decrease in price.


Graph showing leveraged positions being margin called

BFXDATA.com

Edit 8/16/2014: QA with Josh Rossi of BitFinex discussing flash crash

We will update this page as more information/analysis becomes available.


Disclosure:

Matt's current cryptocurrency positions:

Bitcoin, Vertcoin, Darkcoin, NXT, Monero, MaidSafeCoin, Storjcoin.


Disclaimer: This post is intended solely to provide information. As I have no knowledge of individual circumstances and technical level, readers are expected to complete their own due diligence before proceeding with anything mentioned in this article. The topics discussed in this post are advanced and readers proceed at their own risk. Readers are expected to complete their own due diligence before purchasing or selling anything mentioned or recommended.