This is Binance’s explanation for the massive Bitcoin flash crash

A technical glitch on Binance US caused a massive flash crash of as much as 87 percent. The price dropped from $65,815 in seconds to a terrifying low of $8,200. Shortly thereafter, the price shot up again to above $62,000.

The Flash crash on Binance US

Bug in a trading algorithm

The event raised questions about what could be the cause. A company spokesperson pointed to a bug in one of the market maker trading algorithms.

The spokesperson also said traders on Binance US had been made aware of the issue. He added that the issue has also been resolved immediately. Binance has also pledged to investigate the matter further.

Threatening BTC Volatility

Yesterday’s crash coincided with BInance’s CEO warning about the threat of massive volatility. Changpeng Zhao (CZ) had tweeted that crypto enthusiasts should prepare for high volatility within crypto markets.

For example, this week we saw a huge surge in BTC prices. The price reached an all-time high of $67,000 on Wednesday. However, it has since fallen back to around $62,000 at the time of writing.

Analysts attribute the increase to the listing of America’s first BTC futures-linked ETF. The ETF’s listing on the New York Stock Exchange (NYSE) has fueled demand for the coin. It has also raised concerns about a potential sell-off.

Binance CEO is not alone in warning of impending volatility. Mohammed El-Erian of Alianz also reflects these concerns. El-Erian argues that the liquidity surge also stemmed from the Federal Reserve’s Covid-19 stimulus interventions.

The Fed has since warned that it will ease those measures. And El-Erian says investors should be wary. He adds that investors are piggybacking on a liquidity surge caused by the Fed. But this wave will break, sometimes exposing them to higher volatility.

Crash puts Binance US under scrutiny

The development is putting Binance US under close scrutiny. Users have expressed concern that the exchange had no safeguards against such events.

Flash crashes are not new in the financial world. They arise mainly due to the digitization of trading activities. One flaw in the system can cause the sell-off of an asset.

That is why many in the financial sector are taking measures to guard against such events. For example, the New York Stock Exchange has circuit breakers. These stop trading upon detecting sudden price drops.

The exchange’s competitor, Coinbase, has a similar protection mechanism. It has a price protection points feature. The mechanism allows it to cancel all orders that violate certain pricing parameters.

It is not the first time that the company has also experienced such a crash. In December 2019, it suffered a similar fate with BTC dropping more than 90% when trading against the StableUSD stablecoin.

That said, many exchnages have also faced the same situation. This is a concern as it could affect users who have placed stop loss orders. It is not clear whether traders suffered losses during the incident.

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