Bitcoin flash crash triggers $1.36 billion in crypto liquidations

LONDON – Bitcoin has had a sleepy summer. Last week it was shaken awake.

Bitcoin plunged more than 8 per cent in the space of a few hours to a two-month low of US$25,314 on Thursday. The slump sparked a broad decline across all of crypto, leading to more than US$1 billion (S$1.36 billion) in liquidations and putting Bitcoin on pace for its worst week since November 2022 and

crypto exchange FTX’s collapse.

The carnage – fuelled by the prospect of prolonged high interest rates and exacerbated by thin crypto trading – was a reminder of the various threats that continue to stalk digital assets, from hostile regulators to a broader rout in risk assets. And even as Bitcoin has recovered smartly from 2022’s lows, many investors are still sitting out, depriving the market of the breadth and depth that are key ingredients for a sustained bull run.

“There are still significant amounts of macro uncertainty keeping investors away, and liquidity is still thin,” said Ms Noelle Acheson, author of the Crypto Is Macro Now newsletter and former head of market insights at Genesis Trading. “Bottom line, there’s not yet enough conviction.”

Thursday’s activity marked another entry in an emerging trendline for Bitcoin in 2023, with the token having already crashed to two similar low points in January and March. But every sharp decline in 2023 has been followed by recovery, said FRNT Financial’s Stephane Oullette.

“The next few days should give more clues to whether the sell-off will continue and we’ll see a reversal of this year’s trend,” Mr Oullette said. Signs that Bitcoin is making a major divergence would be if the token were to make a decisive break below the US$25,000 mark, he added, or conversely, a sustained push beyond US$30,000. Its high for the year was US$31,818 in July.

Part of the reason behind last week’s plunge was the market’s outsize exposure to larger trades. The last four months have had the lowest average daily volume of spot crypto transactions since October 2020, according to Mr Riyad Carey, a research analyst for blockchain data firm Kaiko.

The sector is also overly reliant on narrative to prop up prices, with hype around crypto’s next buzzy project or a Wall Street firm buying cryptocurrencies among the things that spur on investors. A Wall Street Journal report that Elon Musk’s SpaceX had sold Bitcoin holdings worsened Thursday’s decline.

But the narrative is unlikely to improve when these days, many of the biggest announcements to rock the world of digital assets come either from regulators in Washington or judges in the courtroom. The hangover from 2022’s run of bankruptcies and fraud scandals continues to play out on the world stage, dampening optimism on crypto’s recovery.

Just this week, former FTX co-founder and alleged fraudster Sam Bankman-Fried

was escorted to a Brooklyn penitentiary after his bail deal was revoked by a judge.

Bankman-Fried has pleaded not guilty to the multiple criminal charges he faces.

Recent price declines can be partly attributed to US enforcement actions against crypto exchanges, CoinShares’ James Butterfill said in a blog post on Friday, adding that a recent survey saw fund managers rank regulatory decisions as their key concern. The lingering threat of further lawsuits or penalties haunts the market, leaving investors wary of the safety of some of crypto’s top venues.

Despite this, Bitcoin has displayed a general resilience over the last few months when compared with global risk assets. Post crash, it is still up 58.1 per cent so far in 2023 – far higher than the S&P 500’s 13.6 per cent gain. And while Bitcoin is likely to experience further downside if monetary conditions continue to deteriorate, Bloomberg Intelligence’s Jamie Douglas Coutts reckons that hype around a potential US spot crypto exchange-traded fund may help it maintain that value.

Some crypto bulls say the sector could benefit from situations such as

China’s deteriorating property sector,

which has become a primary concern from a macro perspective. Stimulus measures implemented by the government have so far failed to provide enough economic relief, and Bitcoin’s positioning as an alternative financial system has some believing it might benefit from any shocks.

Ultimately though, what is bad for the global economy is likely also bad for crypto.

“If the stock market drops accelerate, crypto is also likely to suffer in sympathy as investors choose to lock in profits with whatever they can and sit in high-yielding cash until the dust settles,” said Ms Acheson. “The dust will settle, however, most likely sooner in the crypto market than in the stock market as investors recalibrate the relative risk of each asset group.” BLOOMBERG