Last July 2024, the market saw mixed signals with its price movements and trends. As Bitcoin rose, Ethereum hit an 8% drop in its valuation. Other currencies like Solana saw a slight improvement in the market. In the following month, although the stats went up a bit, there needed to be more consistency in the uptrend.
Understanding The Market
The crypto world is mainly known for its volatility and short-term market fluctuations. But the recent crash created chaos among investors, making them sell in panic and causing the market to collapse further.
The collapse of the market triggers liquidation among leveraged traders. This could affect traders gravely even though the market recovers within a short time. The causes for this collapse could be due to a combination of factors like an SEC announcement, liquidation variations, or even casual glitches on exchanges. As trailers are aware of such factors occurring regularly, they usually manage their allocation and set specific risk parameters carefully by setting stop losses and target prices.
Stop-loss orders help mitigate the margin of a trader which could help in flash crashes by selling portions from a pre-set price automatically. These do not guarantee extreme volatility conditions though. During sudden crashes, another step traders can take is to maintain margin. By this method, traders could add funds to a position that can prove to be profitable if the crash is temporary. This could even prevent liquidation to a point but sometimes requires additional capital.
Recent Crashes in the Market
- The first crash that reportedly occurred was in 2011 called the Mt. Gox Attack. Then, Bitcoin had fallen headlong by 99.9% hitting $0.01 after a hack. Although the recovery was swift the incident had caused major trust issues with cryptocurrency.
- China’s Crackdown in 2013: Bitcoin, yet again, fell 51% after China banned bank trading of cryptocurrencies. This took years to finally be stable.
- Market Crash of 2017: Bitcoin hit $19,497 before crashing 80% by 2018. This was partially due to over-leveraged investments.
- COVID-19 had affected everything including the crypto market making the currency fall by 40% but this rebounded within a month by digital asset demands.
- The FTX Collapse: in 2022, the scandals knocked down Bitcoin to $16,000 before a strong recovery in 2023.
- Bitcoin has now surged past $92,500 marking an all-time high driven by US political shifts.
Crypto Flash Crash
A crypto flash crash is an event where the market suffers a sudden drop in prices within a very short time. This tends to trigger a chain reaction as the traders notice this and liquidation occurs from leverage traders. The crash could be from various reasons and usually flash crashes recover quickly. Although as many more traders are inclined to sell their assets, the market takes more time to recover and only slowly climbs up to the price that was there before the crash.
Reasons for the Crash
There may be a lot of reasons for the crash. Some reasons for this crash may be internal and external. Some are as follows:
- Liquidation cascade: This refers to the risk that occurs when a rash causes a node to suddenly need to liquidate its assets causing a fall in prices.
- Thin liquidity: As liquidity refers to the availability of supplies at a time when a stock is meager, that stock will have thin liquidity.
- Market manipulation: this is a scheme that artificially displays the price of the stock or commodity to mislead investors and gain an unfair advantage.
- Black swan events: Events like COVID-19, the SEC announcement. The Terra Lune Collapse, Israel conflict, etc. causes the market to trigger a flash crash.
- Technical and algorithm glitches: Although the chances are less, technical errors in the liquidation engine or glitches on the cryptocurrency exchange platform trigger crashes.
Managing Risk
Managing the risks and sudden crashes could be a task if you are not aware of the downfall it causes. Flash crashes can occur at any time causing chaos among traders. It can occur even on normal days which is why all have to be mindful of the risks and other factors.
Stop-loss orders are essential for mitigating the losses during a flash card. With stop-loss, you can set a pre-determined price to sell your position automatically. This way, even if the market crashes, there will be a limit to the losses you will have to endure. This method is also important when it comes to future trading. A stop-loss order can set the price according to your risk tolerance. Maintenance of the margin is also important when it comes to managing risks. When investors want to keep their trade open and avoid being liquidated, they have to set a margin. This way, in case of a flash crash, the trader will get a margin call on the position at which they are and can opt whether to add funds to the account. If they think that the crash is temporary and will recover quickly, they can opt to add more funds. This can be more profitable to them than closing the position.
Conclusion
By now, you might have had an idea about the market trends and how fast or slow a crash can be affected depending on each situation. So it is up to the traders whether to keep their trade open during a crash after careful speculation and studying the trends. The article may be helpful to you if you are looking for an overview. To get detailed information according to your trade, you will have to deep-search your concerns and goals and watch what works for you. Good Luck trading cryptocurrencies! The future of these digital currencies sure seems bright!