Flash crashes explained


Bitcoin price rises for weeks, and the fear and greed index shows extreme greed (lots of buying pressure and buying on margin). Expectations of positive news may increase F&G.

Bitcoin whale dumps ~2k bitcoins on a big exchange, and the price plummets. They still get a pretty good price for their bitcoins – as they were selling at the top and on the way down. But this eats up the buy wall and prices plummet.

This fast dip liquidates a ton of longs (aka positions bought on margin, bitcoin bought with borrowed money), which means forced bitcoin sales, which further drops the price. Which liquidates more longs – a domino effect.

The temporary bottom is reached very quickly as all those longs are shaken out. Sell pressure drops to zero, and attentive folks with money on exchanges buy the dip in a hurry, resulting in a dead cat bounce. Price recovers about halfway from where it had been before the flash crash.

All those buys slowly wane, as everyone with money available has bought the dip. More buys trickle in as people move money to exchanges to take advantage of the dip but that just keeps the price fairly stable for a while (we are here right now).

The dip shakes confidence and some weaker hands sell because they are afraid that the bull run is over. Whales may encourage this by dumping some more big chunks of BTC. Price continues to decline, recover a bit, and decline some more over the next week or so.

Whale who sold starts buying back the bitcoin they sold (around ~$50k average this time) for a steep discount (likely low $40k’s this time). They do this slowly though, not all at once, so they can keep getting it at the discount price. Meaning the price stays relatively stable but generally rises a little.

Sell pressure wanes almost completely, normal buying pattern returns to the bull market norm, and prices recover.

A month, month and a half go by and the bitcoin price is ~20% above the price it was at step 1.

Go back to step 1.

It’s likely that the whale didn’t even sell their own bitcoin to begin with, but borrowed it (shorted bitcoin, tanking the market with the bitcoin they shorted).

submitted by /u/Loose_with_the_truth
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