What Caused the Crypto Flash-Crash?

September 8, 2021

Cryptocurrencies: Daily Update


Yesterday was pretty hectic for the crypto market but now that the smoke has started to clear we can look to understand what caused the entire space to suddenly crash over 20%.

The news on El Salvador’s adoption of BTC as a national currency garnered a lot of attention yesterday, causing it to be proclaimed by many as the catalyst for the crash. However, this is not the case and if anything was more of a distraction from the technicals than anything else.

First and foremost, we must not take for granted how well the crypto market has performed since the July 21st macro trend change, with BTC topping out yesterday at 80% gains from the July low at $29,300 and ETH reaching a 121% growth from $1,700 over the same 48 day period. This period only saw one 2-week stretch of accumulation patterns, before moving up even more on the last day of August. It is safe to say that yesterday was a healthy reset.

So, if we were overdue on a price reset, then what was the straw that broke the camel's back? Well the answer is hidden from anyone watching just the price movements in the market. Instead, you can turn to blockchain metrics to help identify what went wrong.

Glassnode’s on-chain metrics indicated over $3 billion of long liquidations across the crypto market yesterday, wiping out over-leveraged positions and tanking perpetual funding rates. Cryptocurrency options are extremely risky due to high volatility, and there are exchanges that offer traders up to 100x leverage when placing trades… it becomes easy to see why over-leveraged liquidations can cascade into a spot market selloff as well. Following this upset, there was a near 12% drop of overall crypto market cap.

What kept prices propped up from crashing even further? Well, long-term holders yet again rode out this event, while short-term sellers were being liquidated or running for cover at the first sign of weakness.

With this reset in the books, look for around another 2-4 weeks of price accumulation in the large cap cryptocurrencies before we get ready for another significant move.

Coins to Watch: Cardano (ADA), Solana (SOL), Chainlink (LINK), Numeraire (NMR)

Today’s Winners: Algorand (ALGO) +43%, while Solana is the first large cap cryptocurrency to not only bounce from yesterday’s crash, but actually has already returned to pre-crash prices

Today’s Losers: Uniswap (UNI), Coinbase (Stock: COIN) pending potential SEC lawsuit