After immense gains and momentum from growing public adoption, seemingly every cryptocurrency was rising for much of 2020 and early 2021. But cryptocurrencies across the board have been struggling for over a month now.
Cryptocurrencies' growing popularity drew attention to their volatility, cybercrime susceptibility, and lack of regulations. As a result, the crypto market crashed and has yet to recover fully. Are we in the midst of a flash crash? And what exactly is a flash crash?
What led to the latest crypto flash crash?
As cryptocurrencies like Bitcoin and Dogecoin were building tremendous momentum, alarm bells were ringing. Their growing popularity meant larger market caps, a need for more robust mining infrastructure to keep up with demand and transaction speeds, and vulnerability to cybercrime.
The most notable surge came from enthusiasts of the meme crypto, Dogecoin. Supported by Tesla CEO Elon Musk’s tweets, Dogecoin rallied at the end of 2020 through Q1 2021. The increased enthusiasm brought more education and information regarding the various cryptocurrencies. As the saying goes, “a rising harbor lifts all ships,” and most cryptocurrencies gained value.
However, after a string of negative events, cryptocurrencies across the board came crashing down. Elon Musk, citing environmental concerns, tweeted that Tesla would no longer accept Bitcoin as payment for its electric vehicles, and a massive ransomware attack struck the U.S.’s largest fuel pipeline, Colonial Pipeline, and Bitcoin was demanded as ransom. Governments across the world from India, Hong Kong, and China also announced strict regulations and bans on crypto investing.
Over-leveraged investors read the writing on the wall and exited their positions. The exodus was enough to cause cryptocurrencies to fall to their levels before 2021’s surge.
What's a flash crash?
Cryptocurrencies are strictly a digital marketplace. Investors buy and sell digital currencies through crypto exchanges, such as Coinbase and Binance. A flash crash in cryptocurrencies occurs with a mass withdrawal of stock orders. As a result of this withdrawal, prices quickly fall, sometimes within just a few minutes. However, prices usually rebound by the end of the trading day.
In Apr. 2021, Yahoo Finance reported that Bitcoin experienced a “flash crash” that caused it to lose $10 billion—about 20 percent—in value in a matter of hours. Bitcoin went from just under $65,000 to about $52,100 before recovering to around $56,000. According to Yahoo, more than one million positions were exited before the crash.
Ethereum and Dogecoin followed Bitcoin. All cryptocurrencies saw a significant drop in their values before recovering slightly, but not to pre-crash levels. In fact, the market is still much lower than its peak a couple of months ago. However, that could change quickly again when positive news triggers a rebound.