
Bitcoin August 14 Flash Crash - murtali
https://www.coinprices.io/articles/news/bitcoin-price-update-aug-14-flash-crash
======
mattodell
I am the author of this post. Let me know if you have any questions.

Essentially what happened is that Bitcoin Exchange Bitfinex allows you to
trade with leverage. There were approximately $28M USD worth of leveraged
orders and they were margin called as the price fell. This created a feedback
loop that resulted in the flash crash.

~~~
diminoten
So just to make sure I understand, when BitFinex offers leverage trading, are
they betting that the price of Bitcoin won't go up as high as the folks asking
for leverage think it'll go?

If not, why do people offer leveraged trading? Just for the interest? A fee?

~~~
Guvante
> why do people offer leveraged trading

Bitfenix doesn't provide the leverage, they use other trades to provide it.

Those traders get hourly interest for participating.

If you have a balance and you don't want to use it, loaning it out can make
some money you wouldn't otherwise get.

It is similar to loans but on a shorter window.

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runeks
Reminds me of the good old days of Bitcoinica:
[http://i.imgur.com/TTMjGvB.png](http://i.imgur.com/TTMjGvB.png)

50% swings in minutes.

~~~
makomk
I know there were suspicions that Bitcoinica did that intentionally, and were
making money by forcibly liquidating people's positions through fake price
swings.

~~~
tlrobinson
Was there any evidence?

Anecdotally, in the Bitcoin world, if someone lost money and there's a chance
to allege fraud, someone will do so.

~~~
sillysaurus3
That's a good thing. Bitcoin fraud is the easiest large-scale fraud you could
hope to deploy in the modern day.

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driverdan
What do other US citizens use to trade BTC with stop orders? I've been wanting
setup an account to take advantage of short crashes like this but I'm not sure
what exchanges are open to US citizens. And don't say BTCe, it must have
transparency.

~~~
eldavido
That wouldn't be a stop, it would be a buy/limit order with a price far below
(20-30%) the current market price.

~~~
driverdan
Sorry, you are correct. I misspoke. Buy limits are what I want for purchases
but really I want all standard order types.

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stygiansonic
Margin calls were one aspect that magnified the magnitude of the 1929 stock
market crash.[1] After that, margin regulations (Regulation T) made the
minimum margin rate 50% for stocks, though it appears some brokers may have
been increasing margin requirements to near this level before the 1929
crash.[2]

1\. [http://stocks.fundamentalfinance.com/stock-market-crash-
of-1...](http://stocks.fundamentalfinance.com/stock-market-crash-of-1929.php)

2\.
[https://en.wikipedia.org/wiki/Margin_call](https://en.wikipedia.org/wiki/Margin_call)

~~~
dnautics
It's not just margin calls but leverage in general that turns downcycles into
crashes, if you believe Kindleberger (and you should). [1]

1\. [http://www.amazon.com/Manias-Panics-Crashes-Financial-
Invest...](http://www.amazon.com/Manias-Panics-Crashes-Financial-
Investment/dp/0471467146)

------
EduardoBautista
If the US dollar fluctuated like this, it would cause huge problems to world
economy. But if it happens to bitcoin, it's the most innovative thing to have
happened to the world economy ever!

~~~
jafaku
You realize Bitcoin and the USD are quite different things, right? One has its
price regulated artificially by creating more of it, while the other depends
solely on the whims of the free market. And besides, Bitcoin is much smaller,
and therefore it fluctuates the same way startups' stock fluctuates.

So one could say this: If a startup's stock flucuates like this, it's the most
normal thing in the world. But if it happens to Bitcoin, it's something we
should criticize!

~~~
CocaKoala
Have I fundamentally misunderstood bitcoins? I thought it was a crypto-
currency, not a crypto-stock. If it's supposed to be a currency, then judging
it in relation to how other currencies behave isn't unusual at all. If it's
supposed to be a stock, why does everybody call it a currency?

~~~
jafaku
If you don't see the difference between a currency that can regulate its price
artificially by printing more of it and Bitcoin, then you have definitely
misunderstood it.

If you don't feel comfortable comparing it with stock, then compare it with
gold. Even after thousands of years, and a market capitalization of 8
trillions of dollars, it still has price fluctuations.

Bitcoin has only ~7 billions of dollars of market capitalization. It's
comparable to what we call a "penny stock". Anyone with a few millions can
move the price. And even with hundreds of thousands of dollars, you could move
the price in one particular exchange.

If you still don't understand it, watch this video:

[https://www.youtube.com/watch?v=qHUPPYzzZrI](https://www.youtube.com/watch?v=qHUPPYzzZrI)

------
PaulHoule
I'd think you'd be insane to do anything involving debt or margin with
bitcoins.

~~~
j-g-faustus
Can't agree with that. Betting say $1 on a highly improbable event can't
really be considered "insane" by any metric I can think of - if you lose, so
what, you're only out one dollar.

The risk of the event itself doesn't matter; what matters for your personal
risk is how much of your personal fortune you put into it.

If losing a bet makes you homeless, it's hardly a good bet no matter how good
the odds are.

Conversely, there's barely an "insane" bet in the world as long as the
probability for a payoff is greater than zero (excluding e.g. Nigerian scam
emails), and as long as the amounts involved are small relative to your
disposable capital and the payoff expectation.

Think of it as "how many times do I need to place this bet before I win", vs
"if I win, what's the payoff", vs "if I'm wrong, what's the most I could
lose".

If you get those numbers right, I can't see that bitcoin margin bets are
intrinsically insane.

------
comrh
Has there been fluctuations like this due to algorithmic trading of BTC yet?

------
eldavido
This is called a liquidity trap and it's well-studied in finance circles.
Basically, in order to have a well-functioning market, you need a roughly
balanced number of sellers and buyers at any point.

If an external event triggers enough parties' simultaneous need to sell, it
can suck all the buy orders out of the market, causing the price to fall lower
and lower as the sellers have to submit ever-lower prices to find willing
buyers. The event creates a positive feedback loop as sellers go lower and
lower to find buyers, leading to sharp, discontinuous movements in price.

The ultimate answer to this is tons of market depth/liquidity, but absent
that, exchanges have "circuit-breaker" policies in place that cause trading to
halt if prices move too much, too quickly.

Ultimately, ensuring an orderly market is a massive challenge that shouldn't
be taken lightly.

EDIT: Child is correct, I think liquidity traps are from macro, but same idea
- not enough buyers, too many sellers.

~~~
domdip
This is not called a liquidity trap. That's a concept in macro econ, it has
nothing to do with trading or (this kind of) finance.

~~~
pash
It's usually called a liquidity spiral. Brunnermeier and Pedersen's 2009 paper
[0] is the standard reference. For a quick overview, see their slides [1] or
Pedersen's summary for Vox EU [2].

As Pedersen emphasizes in the Vox article, the amount and price of funding
available to participants in financial markets is intimately related to macro
factors. So market liquidity, through the funding linkage, can dive along with
the real economy.

But liquidity can also evaporate due to endogenous factors, particularly when
markets are set up so that the funding available to traders depends on the
price of the asset being traded, e.g., through margin rules. That's what seems
to have happened on BitFinex today. Positive feedback loops make for ill
behaved markets.

0\.
[http://pages.stern.nyu.edu/~lpederse/papers/Mkt_Fun_Liquidit...](http://pages.stern.nyu.edu/~lpederse/papers/Mkt_Fun_Liquidity.pdf)
[PDF]

1\.
[https://www.newyorkfed.org/registration/research/risk/peders...](https://www.newyorkfed.org/registration/research/risk/pedersen_brunnermeier_slides.pdf)
[PDF]

2\. [http://www.voxeu.org/article/understanding-liquidity-risk-
an...](http://www.voxeu.org/article/understanding-liquidity-risk-and-its-role-
crisis)

~~~
sillysaurus3
Is the grandparent comment otherwise correct, besides the name?

~~~
domdip
Well, the original article makes a claim that this was caused by a margin call
feedback loop (thanks pash for finding the right term and some analysis).

There could be other causes. It's hard to untangle whether BitFinex caused the
other exchanges to drop, or if it just dropped faster due to margin but had no
real effect on the other exchanges.

------
jafaku
Yes, Bitcoin price fluctuates.

Why is this on the frontpage?

~~~
andrewljohnson
I upvoted because the article provided an interesting technical explanation of
the fluctuation.

~~~
cjensen
The technical explanations were (1) large sell order causes price depression
and (2) ensuing margin calls.

Those aren't interesting. The first is expected behavior in any low-liquidity
market. The second is expected behavior if foolish investors are involved in
low-liquidity markets. In other words, this was expected behavior in the
bitcoin markets.

Both factors are also seen regularly in traditional stock markets.

