Cryptocurrency markets around the world were yesterday thrown into panic yesterday when bitcoin fell 28% yesterday, breaking below the $10,000 floor. Ripple fell by 46%, while ethereum lost 30%, dropping below the $1000 floor. This led to over $400 billion being wiped out from the entire market capitalization. Market capitalization is the total value of cryptocurrencies traded in the market.
What caused the flash crash ?
Fear, Uncertainty and Doubt (FUD) in China and North Korea
The South Korean government was rumoured to have instituted a ban on trading of cryptocurrencies by its citizens leading to a fierce protest. The government later issued a clarification, stating that trading with anonymous accounts will no longer be allowed. South Korean exchanges are major players in terms of volume, especially for ripple.
Authorities in China were alleged to have unveiled plans to ban bitcoin mining. The country had last year banned its citizens from trading in cryptocurrencies and ordered exchanges in the country to shut down, leading to a similar crash.
Expired bitcoin contracts
An unlikely yet plausible reason for the crash were bitcoin future contracts that expired yesterday. Though the volume of future trades are a small proportion of the entire market, most of them were set at a strike price of $10,000, thus creating an incentive to crash the price to that level.
Bitcoin futures are simply contracts to buy or sell bitcoin at a particular price or quantity on a specified date. Futures are a way of hedging, with the expectation that the price will go up or down before the appointed date.
Why the fuss about bitcoin ?
Though bitcoin’s dominance has fallen to barely 35% of the entire market cap, the currency serves as the measure of value for most investors. The coin also remains the primary means of exit and entry for several alt coin pairs alongside ethereum.
Will a flash crash repeat itself ?
Another crash could occour in the near future, as many countries either clamp down on trading cryptocurrencies or establish regulations around them. Some bitcoin futures also expected to be liquidated at the end of the month.
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