slid to below $45,000 on Tuesday from a near four-month high of about $52,000, hours after it
debuted as legal tender in El Salvador, the first country to do so.
Other cryptocurrencies such as Ethereum, Binance Coin and Cardano also plunged between 13% and 18% on Tuesday, while meme coins such as Tesla founder Elon Musk-endorsed Dogecoin and Shiba Inu—a cryptocurrency named after a dog-themed meme and launched to rival Dogecoin—dropped as much as 33% and 70%, respectively, at one point.
Experts attributed the ‘flash crash’ to a lack of liquidity in crypto markets, which could give disproportionate power to large holders, and the fact that crypto markets are sentiment-driven and lack proper regulation. Meme coins are particularly volatile and could be driven by a “buy the rumour, sell the news” philosophy, said an industry expert.
Algorithmic trading programmes that sell or buy at pre-set price levels, once activated, could have also added to the pressure, experts said. Unlike traditional stock markets, they said, crypto markets lack circuit breakers, which are triggered in case an index or a stock fluctuates beyond a set threshold. Wild swings are a standard feature of cryptocurrency markets, they added.
‘Pullbacks are Healthy’
The Bitcoin debacle also triggered a sell-off on the world’s largest crypto exchanges Coinbase, Kraken and Gemini.
In India, however, many traders ended up buying the dip.
Homegrown crypto exchange WazirX’s daily trading volume increased to $280 million compared to the usual $100-150 million, its chief executive and cofounder Nischal Shetty said.
Experts and traders said they were not surprised by Bitcoin’s tumble.
“Crypto markets, though growing, aren’t as liquid as traditional financial markets. If there is more liquidity, this [flash crash] is less likely to happen,” Shetty said, adding that there is no data to conclusively explain why a flash crash happens.
According to an India-based full-time Bitcoin trader, sell-offs at sustained peaks are a part of course correction during bull runs.
“Such pullbacks are healthy for a sustained market. If something goes up continuously, it won’t create demand and supply zones, and the eventual drop will be catastrophic as well,” the trader, who did not wish to be named, said.
Vikram Rangala, Chief Operating Officer and Chief Ohana Officer at crypto exchange Zebpay, called it a “normal price correction after a rally”. Ohana is a term that denotes family in Hawaiian.
These are early days in the adoption of cryptocurrency by retail investors, so the flash crash is not unusual in markets with limited users, he said.
“In thin markets, there may be fewer players to buy and sell at those intermediate prices, so you see bigger moves,” Rangala added.
Retail investors told ET that they have made peace with crypto’s volatile nature.
“I actually made a decent profit on some investments I had made in high-risk coins. Now I’m waiting for the big dip so I can reinvest that money,” said Sanil Mahajan, head of supply chain at a large IT company. “One can almost predict the unpredictability of crypto now. I started getting a sense of it last week when a few cryptocurrencies broke through to reach an annual high. These are typical signs of a ‘pump and dump’ scheme, and signal that a big crash is coming in a few days.”
Mrityunjay Lala, a 20-year-old crypto investor from Pune, said anything that rallies so quickly will correct itself in due time.
“Bitcoin rallied from $30,000 in July to $50,000 in September, so a crash was expected. And by now we all know cryptocurrencies are way more volatile than any other asset class,” Lala added.
Dogecoin hit an all-time high of $0.68 in anticipation of Musk’s appearance on the Saturday Night Live show, as investors expected it to cross the $1 threshold, but its value plummeted about 35% within 24 hours of the broadcast.