Bitcoin and Ethereum, the two largest cryptocurrencies by market capitalization, experienced a sudden and sharp drop in their prices on Thursday, August 18, 2023. The flash crash wiped out more than $800 million worth of leveraged positions in the crypto market, according to data from Coinglass.
The price of Bitcoin, the leading digital asset, fell by 7% in 20 minutes and briefly dipped below $26,000, the lowest level since June. Ethereum, the second-largest cryptocurrency, also plunged by 10% and reached as low as $1,576. Other altcoins, such as Ripple, Shiba Inu, and Litecoin, also suffered double-digit losses.
The crypto market crash coincided with two major news events that may have triggered a sell-off among investors. First, China’s Evergrande Group, a giant property developer with over $300 billion in debt, filed for Chapter 15 bankruptcy protection in New York. The move raised fears of a possible contagion effect on the global financial system and sparked a sell-off in the stock market.
Second, a report by the Wall Street Journal revealed that SpaceX, the aerospace company founded by Elon Musk, wrote down the value of its Bitcoin holdings by $373 million and sold an unspecified amount of the cryptocurrency. The news contradicted Musk’s previous statements that SpaceX had not sold any of its Bitcoin and that he personally owned Bitcoin, Ethereum, and Dogecoin.
How did it affect traders?
The flash crash had a devastating impact on traders who used leverage to amplify their gains in the crypto market. Leverage is a technique that allows traders to borrow money from exchanges or brokers to increase their exposure to an asset. However, leverage also magnifies the risk of losing money if the price moves against the trader’s position.
According to Coinglass, a platform that tracks liquidations in the crypto market, more than $801 million worth of leveraged positions were liquidated in the hour after the price started dropping. Liquidation is a process where the exchange or broker automatically closes the trader’s position and takes back the borrowed funds to prevent further losses.
The majority of the liquidated positions were long positions, meaning that traders were betting on the price of Bitcoin and Ethereum to go up. However, when the price suddenly dropped, they were forced to exit their positions at a loss. Coinglass data shows that more than $500 million worth of long positions on Bitcoin and more than $200 million worth of long positions on Ethereum were liquidated.
What is the outlook for the crypto market?
The flash crash has shaken the confidence of many crypto investors who were hoping for a recovery after a prolonged bear market. Bitcoin and Ethereum have both lost more than 50% of their value since reaching their all-time highs in April and May respectively. The crypto market has been under pressure from various factors, such as regulatory uncertainty, environmental concerns, hacking incidents, and competition from other digital assets.
However, some analysts and experts remain optimistic about the long-term prospects of Bitcoin and Ethereum. They argue that both cryptocurrencies have strong fundamentals and innovative features that make them attractive as alternative forms of money and platforms for decentralized applications. They also point out that the crypto market is still in its early stages of development and that volatility is inevitable.
Some of the positive factors that could support the growth of Bitcoin and Ethereum include:
- The increasing adoption of cryptocurrencies by institutional investors, such as hedge funds, pension funds, and corporations.
- The growing demand for cryptocurrencies from retail investors, especially in emerging markets where access to traditional financial services is limited or costly.
- The ongoing innovation and improvement of the technology and infrastructure behind Bitcoin and Ethereum, such as scalability solutions, privacy enhancements, and security upgrades.
- The emergence of new use cases and applications for cryptocurrencies, such as decentralized finance (DeFi), non-fungible tokens (NFTs), gaming, and social media.
