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Bitcoin Flash Crash on Aug 18 at Bitfinex Causes Bitcoin Price to Decline 8% Overnite

A bitcoin flash crash happened August 18 at the Bitfinex exchange. Price dropped from $252 to $162 briefly before recovering to current level of $235 down 8%.

Bitfinex allows margin trading of bitcoin. Apparently one or more investors had placed large bets on margin that bitcoin price would increase. We speculate that due to the uncertainty in the bitcoin community about the Bitcoin XT proposed hard fork in January price declined enough to trigger margin calls.

Bitcoin positions were then closed by the exchange, causing price to further decline. The crash accelerated as worried investors noticed and dumped bitcoin. Bitcoin price dropped briefly to $162 on Bitfinex before bargin hunters rushed in to buy bitcoin at fire sale prices.

These bitcoin flash crashes have happened before and will happen again. In contrast to NYSE, there are no circuit breakers on bitcoin exchanges to halt trading if price starts to drop sharply.

Did the Bitcoin XT Hard Fork Controvery Trigger the Bitcoin Flash Crash?

We find it highly likely that Mike Hearn’s abrupt introduction of Bitcoin XT this past weekend played a part in this bitcoin flash crash.

Really, nothing major has taken place in the bitcoin space since last week that would warrant a sell off except the uncertainty and fear caused by the Bitcoin XT debate. Markets hate uncertainty. Even though a hard fork to Bitcoin XT is unlikely and would not occur until January 2016 earliest investors are worried now.

That worry in our opinion fueled the bitcoin flash crash allowing smart investors to buy bitcoin at a very good price. The flash crash was over in an hour as buyers briefly were able to buy cheap bitcoins for under $200.

Recommendations

We think until the bitcoin block size controversy is over bitcoin price will be volatile. The largest bitcoin mining pools have already made it clear they would like the current 1 MB limit increased to 8 MB as outlined in the BIP 101 patch. However the mining pools would prefer to see Bitcoin Core continue as the official bitcoin client.

The BIP 101 patch is included in Bitcoin XT by default but mining pools do not approve of Bitcoin XT. If you are following the controversy and are tired of the rancor and price volatility you can take steps even if you are not a bitcoin miner:

If you are using Bitcoin Core on your home computer do not change to Bitcoin XT. Everyone who changes votes with their computer to support Bitcoin XT. If you are mining bitcoin use a mining pool that supports Bitcoin Core. At this time only Slush’s Pool has mined a block using Bitcoin XT. Mike Hearn maintains a Google Group for discussion of Bitcoin XT. Join the group to stay up to date. Be polite but make the developer aware that you support Bitcoin Core. Join the bitcoin-dev bitcoin development discussion mailing list. The Bitcoin Core developers post daily to this list and it is the best way to stay up to date on the status of Bitcoin Core. Post to the list and let the core developers know you support Bitcoin Core but are weary of the controversy and would like to see BIP 101 implemented in Bitcoin Core as soon as possible.

Finally do not panic when you see swings in the price of bitcoin. If you believe in the future of bitcoin realize that growing pains are inevitable. Let the developers know you want them to minimize pain and reach consensus.

Take doom and gloom stories from mainstream media with a grain of salt. Most writers for large media outlets do not even own a bitcoin but welcome controversy if they can spin it to increase page views. Take advantage of any future bitcoin flash crash to buy bitcoin at a discount.