Breaking Down The Bitcoin Binance Flash Crash By The Second

On October 21st, 2021, crypto exchange Binance US experienced a Bitcoin flash crash to led BTC’s price to dropped by over 80%. The industry is maturing, but these occurrences reminiscent the times when a crypto flash was business as usual.

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A report by Arcane Research deep dives into the event, starting from the time it happened on the aforementioned date at 11:34:17. At this time, as the research firm claims, a “sudden massive selling pressure cleared the order book” on the exchange.

This caused Bitcoin to crash all the way down to $8,200 for a whole 13 seconds. This parenthesis was enough for Binance US to experience a spike in its trading volume with 550 BTC changing hands, as Arcane Research said.

The research firm compared Binance US normal sell volume to that of this event. The former stands at 0.74 BTC in a 4-hour timeframe, “illustrating that this massive sell order (550 BTC) was” extraordinary, Arcane Research said while adding the following:

What caused the crash? A fat finger by someone meaning to place a limit sell order at $82,000? An engine error? A Combination? Binance has stated that it was caused by a bid in the trading algorithm of one of the institutional traders on the exchange.

This entity created a domino effect which wrack havoc across all Bitcoin exchange platforms. The research claims that the price of BTC dropped $1,000 as a result of this bug.

After, there were irregularities with different exchanges with Kraken seen its BTC/USD pair trading at a “growing discount”, Arcane Research said. On this platform Bitcoin traded at $55,500 while other exchanges were trading at $64,000 per BTC.

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As seen below, the event extended to 11:35:06 with the Kraken discount stabilizing around this period. Arcane Research pointed out that this exchange operates with less efficiency during volatile markets.

Source: Arcane Research
Bitcoin Down The Trading Rabbit Hole

Brett Harrison, President of crypto exchange FTX US, commented on the event. He explained the different trading orders and how they operate when Bitcoin increases its volatility levels.

In this case, the price of BTC trended to the downside reducing the liquidity in the market as it moved further down. Harrison said:

Those trade prices will trigger stop loss or take profit orders, which themselves are market orders and will cause even more liquidity to be taken. The combination of market orders and lack of liquidity cause the price to spiral downwards in an extremely quick fashion.

Harrison clarified that the Binance US Bitcoin crashed was caused by an institution setting a large number of market orders that “cleared the bid side” for the BTC/USD trading pair order book. This triggered a liquidation cascade while BTC’s dropped in the platform.

FTX president used the U.S. futures market to exemplify a different market that used to suffered from this problem until it implemented “guardrails”. This could “help prevent short term microstructure issues”.

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The implementation of these types of solutions, in combination with others, could help bring more “maturity” into the crypto market, the executive claimed.

18/BTC/USD dropping as much as it did on some exchanges was not reflective of an actual move in the fair price of Bitcoin, it was a temporary dislocation due to exchange dynamics. Price bands, volatility pauses, and auctions can help prevent this situation reaching such extremes.

— Brett Harrison (@Brett_FTXUS) October 25, 2021

At the time of writing, BTC trades at $60,412 with a 4.5% loss in the daily chart.

BTC with moderate losses in the daily chart. Source: BTCUSD Tradingview