Bitcoin August 14 Flash Crash(coinprices.io) |
Bitcoin August 14 Flash Crash(coinprices.io) |
Essentially what happened is that Bitcoin Exchange Bitfinex allows you to trade with leverage. There were approximately $28M USD worth of leveraged orders and they were margin called as the price fell. This created a feedback loop that resulted in the flash crash.
If not, why do people offer leveraged trading? Just for the interest? A fee?
Bitfenix doesn't provide the leverage, they use other trades to provide it.
Those traders get hourly interest for participating.
If you have a balance and you don't want to use it, loaning it out can make some money you wouldn't otherwise get.
It is similar to loans but on a shorter window.
But that drop doesn't happen at the same time as the big drop on Bitfinex, as far as I can see. I assume all times are UTC, unless otherwise stated.
The drop in total sum of USD swaps fell from 2014-08-14T07:30 to 2014-08-14T08:30, but the drop on Bitfinex happened around 2014-08-14T10:00
Here's a screenshot of what you are looking for: https://i.imgur.com/SvSFYMK.png
edit1: I also added that graph to the post.
All that aside, Good article, interesting read.
50% swings in minutes.
Anecdotally, in the Bitcoin world, if someone lost money and there's a chance to allege fraud, someone will do so.
1. http://stocks.fundamentalfinance.com/stock-market-crash-of-1...
1. http://www.amazon.com/Manias-Panics-Crashes-Financial-Invest...
The risk of the event itself doesn't matter; what matters for your personal risk is how much of your personal fortune you put into it.
If losing a bet makes you homeless, it's hardly a good bet no matter how good the odds are.
Conversely, there's barely an "insane" bet in the world as long as the probability for a payoff is greater than zero (excluding e.g. Nigerian scam emails), and as long as the amounts involved are small relative to your disposable capital and the payoff expectation.
Think of it as "how many times do I need to place this bet before I win", vs "if I win, what's the payoff", vs "if I'm wrong, what's the most I could lose".
If you get those numbers right, I can't see that bitcoin margin bets are intrinsically insane.
If an external event triggers enough parties' simultaneous need to sell, it can suck all the buy orders out of the market, causing the price to fall lower and lower as the sellers have to submit ever-lower prices to find willing buyers. The event creates a positive feedback loop as sellers go lower and lower to find buyers, leading to sharp, discontinuous movements in price.
The ultimate answer to this is tons of market depth/liquidity, but absent that, exchanges have "circuit-breaker" policies in place that cause trading to halt if prices move too much, too quickly.
Ultimately, ensuring an orderly market is a massive challenge that shouldn't be taken lightly.
EDIT: Child is correct, I think liquidity traps are from macro, but same idea - not enough buyers, too many sellers.
As Pedersen emphasizes in the Vox article, the amount and price of funding available to participants in financial markets is intimately related to macro factors. So market liquidity, through the funding linkage, can dive along with the real economy.
But liquidity can also evaporate due to endogenous factors, particularly when markets are set up so that the funding available to traders depends on the price of the asset being traded, e.g., through margin rules. That's what seems to have happened on BitFinex today. Positive feedback loops make for ill behaved markets.
0. http://pages.stern.nyu.edu/~lpederse/papers/Mkt_Fun_Liquidit... [PDF]
1. https://www.newyorkfed.org/registration/research/risk/peders... [PDF]
2. http://www.voxeu.org/article/understanding-liquidity-risk-an...
Why is this on the frontpage?
Those aren't interesting. The first is expected behavior in any low-liquidity market. The second is expected behavior if foolish investors are involved in low-liquidity markets. In other words, this was expected behavior in the bitcoin markets.
Both factors are also seen regularly in traditional stock markets.
Right now market liquidity on Bitstamp (I think that's the biggest exchange?) is 3 million per day. If you want to trade and buy $3m of Bitcoins, you're going to have a huge impact on the price. This is not an unreasonable transaction for larger parties and investment firms.
I don't know what the liquidity on the USD is, but consume an entire days worth of trade volume between USD and say, the Euro, you pretty much have to be a small country.
A lot of these fluctuations will smooth out greatly as Bitcoin's actual use and liquidy goes up. If investment firms and hedge funds start giving serious attention to Bitcoin, you'll see it approach a stability closer to that of gold. Still not the USD standard of stability, but a lot better than what it is today.
So one could say this: If a startup's stock flucuates like this, it's the most normal thing in the world. But if it happens to Bitcoin, it's something we should criticize!
Not on these scales. Artificial adjustments to the dollar happen on month increments, possibly days.
> while the other depends solely on the whims of the free market
Free is relative, the Bitcoin market is still too small to be isolated from manipulation.
> same way startups' stock fluctuates
Care to quote a startup stock that is traded decently (Bitcoin isn't a penny stock) and has a 10% dip in minutes that isn't newsworthy for anyone interested in that stock?
Because I can bet anyone following it would find it newsworthy.
/s
Especially since bfxdata is a third party site.
If you don't feel comfortable comparing it with stock, then compare it with gold. Even after thousands of years, and a market capitalization of 8 trillions of dollars, it still has price fluctuations.
Bitcoin has only ~7 billions of dollars of market capitalization. It's comparable to what we call a "penny stock". Anyone with a few millions can move the price. And even with hundreds of thousands of dollars, you could move the price in one particular exchange.
If you still don't understand it, watch this video:
There could be other causes. It's hard to untangle whether BitFinex caused the other exchanges to drop, or if it just dropped faster due to margin but had no real effect on the other exchanges.
> Not on these scales. Artificial adjustments to the dollar happen on month increments, possibly days.
To give you a sense of perspective, the FED was printing $55bn/month this year [0]. So the FED prints the whole Bitcoin economy ($6.7bn) every 3.6 days, ... day after day, month after month ... for many many years now [1].
[0] http://www.forbes.com/sites/samanthasharf/2014/03/19/fed-cut...
[1] http://static4.businessinsider.com/image/52e4250869bedd404cb...
"traded decently", gotta love those vague expressions.
Any company that at some point was just a small startup, sold stock privately, and today is big, has had these swings. Eg: Facebook, Amazon, etc.
If you don't know this, it probably means you have never bought private stock.
