In a sudden and dramatic turn of events, Bitcoin's price plummeted by nearly 19% overnight, triggering widespread liquidations and even causing major cryptocurrency exchanges to experience outages. The sharp decline left many investors and market participants searching for answers.
The Sudden Price Collapse
Within just over an hour, Bitcoin's value dropped from approximately $50,000 to a low of $42,830—a decline of nearly $7,000. At its lowest point, the cryptocurrency was down 18.73% for the day. Although the price partially recovered shortly after the flash crash, it still remained down approximately 11% at the time of reporting.
This sell-off interrupted a remarkable rally that had seen Bitcoin surge by 76% over the past month, rising from $29,796 on July 20 to a high of $52,698 on September 6.
Other major cryptocurrencies also experienced significant declines. Ethereum fell over 13%, while Ripple dropped nearly 20% in the same period. The bearish sentiment extended to blockchain-related stocks in the traditional equity markets as well.
Widespread Liquidations and Exchange Disruptions
The abrupt and broad-based decline across cryptocurrency markets resulted in massive liquidations. Data reveals that within a 24-hour period, approximately 397,559 traders faced liquidations totaling roughly $281.61 million.
Among these, the largest single liquidation order amounted to $43.7 million, equivalent to approximately 283 million RMB.
The extreme volatility and surging trading volumes overwhelmed several cryptocurrency platforms. Leading exchange Coinbase experienced significant technical difficulties, with users reporting canceled orders and an inability to execute trades.
Coinbase Support acknowledged the issues on Twitter, noting that transactions were being delayed or canceled and that the application might contain errors. The exchange later confirmed that services had been restored to normal operation by early morning.
As Bitcoin's price collapsed, Coinbase's stock price also fell, closing the day with a decline of over 4%.
Positive News Preceded the Crash
Ironically, the flash crash occurred amid several seemingly positive developments for Bitcoin. Most notably, El Salvador had just formally adopted Bitcoin as legal tender, marking the first time a country had granted a cryptocurrency such status.
Additionally, retail investor enthusiasm had been growing, with discussions on platforms like Reddit centered around purchasing $30 worth of Bitcoin in solidarity with El Salvador's move.
The Central American nation, which had previously adopted the U.S. dollar as official currency in 2001, stated that the dollar would continue to circulate alongside Bitcoin. President Nayib Bukele argued that Bitcoin adoption would save Salvadorans living abroad approximately $400 million annually in remittance fees. To encourage adoption, the government promised each user of the official state-sponsored Bitcoin wallet $30 in Bitcoin.
Notably, remittances account for over one-fifth of El Salvador's GDP. World Bank data indicates that in 2020, remittances to the country exceeded $5.9 billion, primarily from the United States.
Following the legal tender announcement, U.S. retail investors showed increased interest. On September 7, users on Reddit and Twitter discussed plans to purchase $30 in Bitcoin to mark the occasion. Prominent Bitcoin advocate Michael Saylor also encouraged his followers to join the movement in support of El Salvador's policy.
Potential Causes of the Sharp Decline
Several factors may have contributed to the sudden downturn. Analysts suggested that profit-taking following a prolonged rally played a significant role.
According to market expert Tony Spilotro, investors and traders may not necessarily be bearish on Bitcoin, but taking profits is rarely unwise. This behavior can have a cascading effect, particularly on over-leveraged long positions, triggering stop-loss orders and accelerating the decline.
Concerns over the broader adoption of Bitcoin as legal tender also emerged. Just hours before the crash, the Kremlin announced that Russia was not prepared to recognize Bitcoin. The World Bank also declined to assist El Salvador with its Bitcoin implementation due to environmental and transparency concerns.
International financial institutions, including the International Monetary Fund and the Inter-American Development Bank, had previously expressed reservations about the financial risks associated with El Salvador's decision.
Even within El Salvador, the adoption of Bitcoin faced significant public opposition. Recent polls indicated that a majority of Salvadorans opposed granting Bitcoin legal tender status. Hundreds had protested in the capital, San Salvador, the previous week.
Some citizens expressed concern about the volatility of Bitcoin and its potential to complicate financial regulation, facilitate illegal activities, and widen economic inequality.
Spilotro also raised the possibility that the crash represented a "buy the rumor, sell the news" event—a situation where traders sell an asset after a anticipated positive event occurs, regardless of the actual outcome.
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U.S. Stock Market Reaction
In contrast to the turmoil in cryptocurrency markets, U.S. equity markets displayed relative stability, though major indices closed mixed.
At the close of trading on Tuesday, the Dow Jones Industrial Average fell 269 points, or 0.76%, to 35,100. The S&P 500 declined 0.34% to 4,520.03, while the Nasdaq Composite gained 1.07% to 15,374.30.
Concerns over the COVID-19 pandemic contributed to the cautious sentiment, as the United States surpassed 40 million cumulative reported cases.
Despite the overall muted performance, several prominent U.S.-listed Chinese companies outperformed the broader market. Pinduoduo rose 5.39%, JD.com gained 4.24%, and Alibaba advanced 2.85%.
Electric vehicle makers also saw gains: Nio increased 0.54%, XPeng climbed 5.08%, and Li Auto rose 2.34%. In the gaming sector, NetEase added 2.95%. Other notable gainers included Didi Chuxing, which jumped 7.43%, and KE Holdings, which surged 15.91%.
Frequently Asked Questions
What caused Bitcoin to crash suddenly?
The sharp decline appears to have been triggered by a combination of profit-taking after a significant rally, concerns about broader adoption following El Salvador's legal tender announcement, and technical issues at major exchanges that exacerbated selling pressure.
How long did the Bitcoin flash crash last?
The most intense phase of the sell-off lasted approximately one hour, during which Bitcoin's price fell nearly $7,000. However, markets remained volatile for several hours afterward.
Which cryptocurrencies were affected by the crash?
Nearly all major cryptocurrencies declined significantly. Ethereum dropped over 13%, while Ripple fell nearly 20%. The sell-off was broad-based across digital assets.
Did cryptocurrency exchanges recover after the crash?
Yes, though several major exchanges experienced temporary outages or delays during the peak volatility, most including Coinbase reported that their systems had returned to normal operation within hours.
What does Bitcoin becoming legal tender in El Salvador mean?
It marks the first time a country has adopted Bitcoin as official currency alongside the U.S. dollar. The government believes it will reduce remittance costs, though the move has been met with domestic and international skepticism.
Should investors be concerned about future flash crashes?
While volatility is inherent in cryptocurrency markets, flash crashes of this magnitude are relatively rare. Investors should maintain appropriate risk management strategies, including avoiding excessive leverage and diversifying holdings.