The price of Bitcoin fell by 14% in just 30 minutes after last night’s flash crash on Bitcoin exchange Bitfinex.
Coindesk’s Bitcoin Price Index, which had been relatively stable between $250 and $255, plummeted to $214.36 just before midnight (UTC). At the same time, Bitfinex’s stock price fell to $179.35, a drop of 29%.
Bitfinex is known as the most liquid exchange in the world, but it crashed after a large order worth 10,000 Bitcoins ($2.3 million) was placed.
The exchange’s Twitter updated at 03:22 this morning: “Stock sales during the massive Bitcoin sell-off are legal and for profit-making purposes, and lenders will not be affected.”
In addition to providing normal Bitcoin buying and selling orders, Bitfinex also provides margin trading, which means that users can borrow funds from the exchange platform's lenders (peer-to-peer liquidity providers) at a certain interest rate to conduct Bitcoin transactions and place long or short bets on the rise or fall of Bitcoin prices.
Like the sudden price shock that occurred yesterday, when the account assets of long users who borrowed funds to trade fell to zero, the Bitfinex exchange would automatically liquidate their futures positions. This will undoubtedly intensify the volatility of Bitcoin prices, and the selling pressure brought by these futures positions will continue to act on the already collapsed market.
breaker
There are some methods to mitigate such violent price fluctuations. For example, some traditional exchanges will limit the fluctuation space by 10% on the previous day's closing price, but it is still unknown whether Bitfinext Exchange has such a circuit breaker.
In an interview with “Whale Club” members, Bitfinex’s Phil Potter hinted that the Bitcoin platform has encountered a number of technical difficulties, including lagging in the service engine that updates position information.
Timo Schlaefer, CEO of Bitcoin derivatives trading platform Crypto Facilities, told CoinDesk that margin trading on exchanges has destabilized Bitcoin prices and led to many flash crashes in the past. The flash crash of Bitfinex and BTC-e last August caused the price of Bitcoin to fall by 10%.
“Whether you want to firmly only do spot foreign exchange (no margin trading) or something else, you need to make a choice between this. You can’t have both.” He added: “This is very bad for Bitcoin, because the Bitcoin market is still very immature and unreliable, and there seems to be no progress in this regard last year.”
Margin trading is already very common in most markets, but it is still a relatively new phenomenon for the Bitcoin market. Only two exchanges have added margin trading in the past two months.
However, a Bitcoin market maker who wished to remain anonymous said that flash crashes do not only occur in markets with margin trading. “Even if you don’t borrow from a Bitcoin platform, if you want to engage in margin trading, you will find other ways to borrow money to support your gambling habit.”
He also said that the "gambling mentality" in the Bitcoin field has also exacerbated Bitcoin's price fluctuations, and traders are willing to use leverage to risk funds.
At the same time, he also believes that the uncertainty and public controversy caused by the Bitcoin XT software branch will inevitably negatively affect the price of Bitcoin.
