A Recap of the September 5 Flash Crash
On September 5, 2018, the digital asset market experienced a major crash. Starting at 5:48 am ET, within 24h, Bitcoin had dropped by more than 13%, Ether by more than 20% and many altcoins suffered even higher losses.
A Sudden Increase in Trading Volume
In the week prior to September 5, the average ETH/USD trading volume stood at 462.8 ETH per minute.
At 5:48, within 60 seconds, 3000 ETH changed hands. In the following five minutes, this rate increased to 10,000 ETH (+2,000%!) per minute.
By comparison, between 5:48 and 5:49, the BTC trading volume was only about twice as high as the week’s average and only picked up gradually in the following minutes.
During the sell-offs Bitfinex was by far the most active market and contributed more than 50% of the total ‘crash’ trading volume. By comparison, on normal trading days (such as the week before September 5), Bitfinex only accounts for 20% of the total ETH/USD trading volume.
The sell-off led to a quick decline in ETH prices and the drops correlate well with the spikes in trading volumes. A similar pattern can be observed for BTC markets. However, the BTC sell-offs happened with a delay compared to the ETH trades and thus are likely a result rather than the cause of the ETH sell-offs.
Possible Explanations for the Sell-Off
One possible explanation for the big sell-off is the movement of 70,000 ETH by Digix on September 4th. Digix is one of the biggest ICOs in terms of Ether raised. Digix announced that it will liquidate $20m worth of Ether in the following days. A spokesperson commented:
“All of the ETH will be sold via OTC market makers, and will not be done in one full tranche so as to prevent us from being front runned.”
“We are seeking treasury management services for the ETH. It is likely to be composed of a mixture of Fiat/DGX/DAI.”
Even though Digix is unlikely to be the responsible for the high trading volume, their announcement may have pressured other ICO companies or big ETH holders to liquidate first.
Another explanation is the alleged retraction of Goldman Sachs from plans to open a cryptocurrency trading desk in 2018. However, Goldman Sachs CFO Martin Chavez clarified that such plans never existed in the first place and corrected:
“When we talked about exploring digital assets […] it was going to be exploration that would be evolving over time. Maybe someone who was thinking about our activities here got very excited that we would be making markets as principal and physical Bitcoin, and as they got into it they realized part of the evolution but its not here yet."
In general, taking into account the nervousness in the digital asset market and the rise of margin trading/automatic trading, even relatively insignificant news or trades can cause a cascade effect.
Summary
With trading volumes becoming thinner and thinner (see for example our Q2 report), larger orders can quickly clear up an order book and escalate into a major sell-off. In the absence of classical market makers, such events are not unexpected and also a likely reason why the SEC is hesitant to approve a Bitcoin or Ether ETF anytime soon.
*Data Acquisition and Disclaimer
All data has been obtained from cryptocompare, queried with pandas and visualized with infogram and chartblocks.
The above references an opinion and is for information purposes and educational purposes only. All information contained herein should be independently verified and confirmed. We do not accept any liability for any loss or damage whatsoever caused in reliance upon such information or services. Please be aware of the risks involved with any trading done in any financial market. Do not trade with money that you cannot afford to lose. When in doubt, you should consult a qualified financial adviser before making any investment decisions.
