Flash crash

What Is a Flash Crash?

A flash crash refers to a very rapid, deep, and volatile drop in asset prices within an electronic market. This event usually occurs within minutes, significantly affecting the value of currencies, stocks, and cryptocurrencies. Flash crashes are often temporary and prices may recover quickly after the initial plunge.

How Does a Flash Crash Happen?

Flash crashes often happen due to high-frequency trading algorithms. These algorithms can create disproportional selling activity based on slight market triggers. Another cause is a large sell order that overwhelms the market's liquidity. In less liquid markets, such as certain cryptocurrency exchanges, even small trades can cause big price shifts.

Impact on Cryptocurrency and Exchanges

In the realm of cryptocurrency, where markets operate 24/7 and across many platforms, a flash crash can be even more dramatic. Liquidity issues or panic selling can escalate quickly, leading to rapid price declines. Major exchanges and all-in-one platforms must monitor and manage such risks to protect traders and maintain market order.

Flash Crash Examples in Crypto

On May 19, 2021, Ethereum dropped by over 40% but recovered significantly within hours. This drastic drop and recovery typify a flash crash. Such instances highlight the volatility and unpredictability of digital currency markets.

Minimizing Risks

For investors, understanding the mechanisms of flash crashes is crucial. Traders should use risk management tools like stop-loss orders to protect investments. Exchanges and trading platforms also implement safeguards such as 'circuit breakers' to pause trading and prevent further price deterioration during a market crash.