9 ms·

Bitcoin August 14 Flash Crash

106 points by murtali 12y ago

jafaku 12y ago
Yes, Bitcoin price fluctuates. Why is this on the frontpage?
- andrewljohnson 12y ago
  I upvoted because the article provided an interesting technical explanation of the fluctuation.
  - cjensen 12y ago
    The technical explanations were (1) large sell order causes price depression and (2) ensuing margin calls. Those aren't interesting. The first is expected behavior in any low-liquidity market. The second is expected behavior if foolish investors are involved in low-liquidity markets. In other words, this was expected behavior in the bitcoin markets. Both factors are also seen regularly in traditional stock markets.
- Guvante 12y ago
  A 10% swing in minutes is out of character even for Bitcoin.
  - jafaku 12y ago
    Not really. From this and your other comments it's now clear that not only you don't know anything about private stock, you don't anything about Bitcoin's history either.
runeks 12y ago
Reminds me of the good old days of Bitcoinica: http://i.imgur.com/TTMjGvB.png http://i.imgur.com/TTMjGvB.png 50% swings in minutes.
- makomk 12y ago
  I know there were suspicions that Bitcoinica did that intentionally, and were making money by forcibly liquidating people's positions through fake price swings.
  - tlrobinson 12y ago
    Was there any evidence? Anecdotally, in the Bitcoin world, if someone lost money and there's a chance to allege fraud, someone will do so.
    - sillysaurus3 12y ago
      That's a good thing. Bitcoin fraud is the easiest large-scale fraud you could hope to deploy in the modern day.
mattodell 12y ago
I am the author of this post. Let me know if you have any questions. Essentially what happened is that Bitcoin Exchange Bitfinex allows you to trade with leverage. There were approximately $28M USD worth of leveraged orders and they were margin called as the price fell. This created a feedback loop that resulted in the flash crash.
- oillio 12y ago
  You said there was $28M in leverage before the crash. Do you know what the leverage is currently?
  - mattodell 12y ago
    If you go to BFXdata.com you can see historical graphs for it. Bitfinex reports their leveraged volume every hour. Here's a screenshot of what you are looking for: https://i.imgur.com/SvSFYMK.png https://i.imgur.com/SvSFYMK.png edit1: I also added that graph to the post.
  - runeks 12y ago
    It fell from $29M to $24M: http://www.bfxdata.com/swaphistory/totals.php http://www.bfxdata.com/swaphistory/totals.php But that drop doesn't happen at the same time as the big drop on Bitfinex, as far as I can see. I assume all times are UTC, unless otherwise stated. The drop in total sum of USD swaps fell from 2014-08-14T07:30 to 2014-08-14T08:30, but the drop on Bitfinex happened around 2014-08-14T10:00
    - mattodell 12y ago
      The thing is that Bitfinex only reports their leveraged volume every hour so you can't really pinpoint the margin calls. Especially since bfxdata is a third party site.
- diminoten 12y ago
  So just to make sure I understand, when BitFinex offers leverage trading, are they betting that the price of Bitcoin won't go up as high as the folks asking for leverage think it'll go? If not, why do people offer leveraged trading? Just for the interest? A fee?
EduardoBautista 12y ago
If the US dollar fluctuated like this, it would cause huge problems to world economy. But if it happens to bitcoin, it's the most innovative thing to have happened to the world economy ever!
- deleted 12y ago
  [deleted]
- blhack 12y ago
  Bitcoin is obviously useless and will surely never be of any use to anybody ever. /s
- jafaku 12y ago
  You realize Bitcoin and the USD are quite different things, right? One has its price regulated artificially by creating more of it, while the other depends solely on the whims of the free market. And besides, Bitcoin is much smaller, and therefore it fluctuates the same way startups' stock fluctuates. So one could say this: If a startup's stock flucuates like this, it's the most normal thing in the world. But if it happens to Bitcoin, it's something we should criticize!
  - Guvante 12y ago
    > One has its price regulated artificially by creating more of it Not on these scales. Artificial adjustments to the dollar happen on month increments, possibly days. > while the other depends solely on the whims of the free market Free is relative, the Bitcoin market is still too small to be isolated from manipulation. > same way startups' stock fluctuates Care to quote a startup stock that is traded decently (Bitcoin isn't a penny stock) and has a 10% dip in minutes that isn't newsworthy for anyone interested in that stock? Because I can bet anyone following it would find it newsworthy.
    - sp332 12y ago
      This swing is newsworthy, but EduardoBautista said it would cause huge problems to the world economy, which is not the same thing.
comrh 12y ago
Has there been fluctuations like this due to algorithmic trading of BTC yet?
eldavido 12y ago
This is called a liquidity trap and it's well-studied in finance circles. Basically, in order to have a well-functioning market, you need a roughly balanced number of sellers and buyers at any point. If an external event triggers enough parties' simultaneous need to sell, it can suck all the buy orders out of the market, causing the price to fall lower and lower as the sellers have to submit ever-lower prices to find willing buyers. The event creates a positive feedback loop as sellers go lower and lower to find buyers, leading to sharp, discontinuous movements in price. The ultimate answer to this is tons of market depth/liquidity, but absent that, exchanges have "circuit-breaker" policies in place that cause trading to halt if prices move too much, too quickly. Ultimately, ensuring an orderly market is a massive challenge that shouldn't be taken lightly. EDIT: Child is correct, I think liquidity traps are from macro, but same idea - not enough buyers, too many sellers.
- domdip 12y ago
  This is not called a liquidity trap. That's a concept in macro econ, it has nothing to do with trading or (this kind of) finance.
  - pash 12y ago
    It's usually called a liquidity spiral. Brunnermeier and Pedersen's 2009 paper [0] is the standard reference. For a quick overview, see their slides [1] or Pedersen's summary for Vox EU [2]. As Pedersen emphasizes in the Vox article, the amount and price of funding available to participants in financial markets is intimately related to macro factors. So market liquidity, through the funding linkage, can dive along with the real economy. But liquidity can also evaporate due to endogenous factors, particularly when markets are set up so that the funding available to traders depends on the price of the asset being traded, e.g., through margin rules. That's what seems to have happened on BitFinex today. Positive feedback loops make for ill behaved markets. 0. http://pages.stern.nyu.edu/~lpederse/papers/Mkt_Fun_Liquidity.pdf http://pages.stern.nyu.edu/~lpederse/papers/Mkt_Fun_Liquidit... [PDF] 1. https://www.newyorkfed.org/registration/research/risk/pedersen_brunnermeier_slides.pdf https://www.newyorkfed.org/registration/research/risk/peders... [PDF] 2. http://www.voxeu.org/article/understanding-liquidity-risk-and-its-role-crisis http://www.voxeu.org/article/understanding-liquidity-risk-an...
driverdan 12y ago
What do other US citizens use to trade BTC with stop orders? I've been wanting setup an account to take advantage of short crashes like this but I'm not sure what exchanges are open to US citizens. And don't say BTCe, it must have transparency.
- deleted 12y ago
  [deleted]
- domdip 12y ago
  Be careful, stop orders only help if there is a reasonable amount of liquidity when you reach your stop price. If it's not there (and often isn't during a flash crash) you may get terrible execution.
- ertdfgcb 12y ago
  Bitfinex does shorts, which is similar I guess.
- pmorici 12y ago
  If you are in the US the easiest way to get money into an actual exchange seems to be by buying BTC via coinbase (they support ACH transactions for US citezens) and then transferring it to an exchange such as Coinsetter, Bitfinex, or Bitstamp to trade. Coinsetter is based in the US and will rebate you your Coinbase transaction fees.
- eldavido 12y ago
  That wouldn't be a stop, it would be a buy/limit order with a price far below (20-30%) the current market price.
  - driverdan 12y ago
    Sorry, you are correct. I misspoke. Buy limits are what I want for purchases but really I want all standard order types.
PaulHoule 12y ago
I'd think you'd be insane to do anything involving debt or margin with bitcoins.
- kordless 12y ago
  Lots of 'insane' people in the world. Makes it interesting.
- jafaku 12y ago
  I'd think you'd be insane to miss an investment with such a disproportionate potential returns / risk.
- j-g-faustus 12y ago
  Can't agree with that. Betting say $1 on a highly improbable event can't really be considered "insane" by any metric I can think of - if you lose, so what, you're only out one dollar. The risk of the event itself doesn't matter; what matters for your personal risk is how much of your personal fortune you put into it. If losing a bet makes you homeless, it's hardly a good bet no matter how good the odds are. Conversely, there's barely an "insane" bet in the world as long as the probability for a payoff is greater than zero (excluding e.g. Nigerian scam emails), and as long as the amounts involved are small relative to your disposable capital and the payoff expectation. Think of it as "how many times do I need to place this bet before I win", vs "if I win, what's the payoff", vs "if I'm wrong, what's the most I could lose". If you get those numbers right, I can't see that bitcoin margin bets are intrinsically insane.
stygiansonic 12y ago
Margin calls were one aspect that magnified the magnitude of the 1929 stock market crash.[1] After that, margin regulations (Regulation T) made the minimum margin rate 50% for stocks, though it appears some brokers may have been increasing margin requirements to near this level before the 1929 crash.[2] 1. http://stocks.fundamentalfinance.com/stock-market-crash-of-1929.php http://stocks.fundamentalfinance.com/stock-market-crash-of-1... 2. https://en.wikipedia.org/wiki/Margin_call https://en.wikipedia.org/wiki/Margin_call
- dnautics 12y ago
  It's not just margin calls but leverage in general that turns downcycles into crashes, if you believe Kindleberger (and you should). [1] 1. http://www.amazon.com/Manias-Panics-Crashes-Financial-Investment/dp/0471467146 http://www.amazon.com/Manias-Panics-Crashes-Financial-Invest...
deleted 12y ago
[deleted]

106 points by murtali 12y ago

jafaku 12y ago

Yes, Bitcoin price fluctuates. Why is this on the frontpage?

andrewljohnson 12y ago
I upvoted because the article provided an interesting technical explanation of the fluctuation.
- cjensen 12y ago
  The technical explanations were (1) large sell order causes price depression and (2) ensuing margin calls. Those aren't interesting. The first is expected behavior in any low-liquidity market. The second is expected behavior if foolish investors are involved in low-liquidity markets. In other words, this was expected behavior in the bitcoin markets. Both factors are also seen regularly in traditional stock markets.
Guvante 12y ago
A 10% swing in minutes is out of character even for Bitcoin.
- jafaku 12y ago
  Not really. From this and your other comments it's now clear that not only you don't know anything about private stock, you don't anything about Bitcoin's history either.

runeks 12y ago

Reminds me of the good old days of Bitcoinica: http://i.imgur.com/TTMjGvB.png http://i.imgur.com/TTMjGvB.png 50% swings in minutes.

makomk 12y ago
I know there were suspicions that Bitcoinica did that intentionally, and were making money by forcibly liquidating people's positions through fake price swings.
- tlrobinson 12y ago
  Was there any evidence? Anecdotally, in the Bitcoin world, if someone lost money and there's a chance to allege fraud, someone will do so.
  - sillysaurus3 12y ago
    That's a good thing. Bitcoin fraud is the easiest large-scale fraud you could hope to deploy in the modern day.

mattodell 12y ago

I am the author of this post. Let me know if you have any questions. Essentially what happened is that Bitcoin Exchange Bitfinex allows you to trade with leverage. There were approximately $28M USD worth of leveraged orders and they were margin called as the price fell. This created a feedback loop that resulted in the flash crash.

oillio 12y ago
You said there was $28M in leverage before the crash. Do you know what the leverage is currently?
- mattodell 12y ago
  If you go to BFXdata.com you can see historical graphs for it. Bitfinex reports their leveraged volume every hour. Here's a screenshot of what you are looking for: https://i.imgur.com/SvSFYMK.png https://i.imgur.com/SvSFYMK.png edit1: I also added that graph to the post.
- runeks 12y ago
  It fell from $29M to $24M: http://www.bfxdata.com/swaphistory/totals.php http://www.bfxdata.com/swaphistory/totals.php But that drop doesn't happen at the same time as the big drop on Bitfinex, as far as I can see. I assume all times are UTC, unless otherwise stated. The drop in total sum of USD swaps fell from 2014-08-14T07:30 to 2014-08-14T08:30, but the drop on Bitfinex happened around 2014-08-14T10:00
  - mattodell 12y ago
    The thing is that Bitfinex only reports their leveraged volume every hour so you can't really pinpoint the margin calls. Especially since bfxdata is a third party site.
diminoten 12y ago
So just to make sure I understand, when BitFinex offers leverage trading, are they betting that the price of Bitcoin won't go up as high as the folks asking for leverage think it'll go? If not, why do people offer leveraged trading? Just for the interest? A fee?

EduardoBautista 12y ago

If the US dollar fluctuated like this, it would cause huge problems to world economy. But if it happens to bitcoin, it's the most innovative thing to have happened to the world economy ever!

deleted 12y ago
[deleted]
blhack 12y ago
Bitcoin is obviously useless and will surely never be of any use to anybody ever. /s
jafaku 12y ago
You realize Bitcoin and the USD are quite different things, right? One has its price regulated artificially by creating more of it, while the other depends solely on the whims of the free market. And besides, Bitcoin is much smaller, and therefore it fluctuates the same way startups' stock fluctuates. So one could say this: If a startup's stock flucuates like this, it's the most normal thing in the world. But if it happens to Bitcoin, it's something we should criticize!
- Guvante 12y ago
  > One has its price regulated artificially by creating more of it Not on these scales. Artificial adjustments to the dollar happen on month increments, possibly days. > while the other depends solely on the whims of the free market Free is relative, the Bitcoin market is still too small to be isolated from manipulation. > same way startups' stock fluctuates Care to quote a startup stock that is traded decently (Bitcoin isn't a penny stock) and has a 10% dip in minutes that isn't newsworthy for anyone interested in that stock? Because I can bet anyone following it would find it newsworthy.
  - sp332 12y ago
    This swing is newsworthy, but EduardoBautista said it would cause huge problems to the world economy, which is not the same thing.

comrh 12y ago

Has there been fluctuations like this due to algorithmic trading of BTC yet?

eldavido 12y ago

This is called a liquidity trap and it's well-studied in finance circles. Basically, in order to have a well-functioning market, you need a roughly balanced number of sellers and buyers at any point. If an external event triggers enough parties' simultaneous need to sell, it can suck all the buy orders out of the market, causing the price to fall lower and lower as the sellers have to submit ever-lower prices to find willing buyers. The event creates a positive feedback loop as sellers go lower and lower to find buyers, leading to sharp, discontinuous movements in price. The ultimate answer to this is tons of market depth/liquidity, but absent that, exchanges have "circuit-breaker" policies in place that cause trading to halt if prices move too much, too quickly. Ultimately, ensuring an orderly market is a massive challenge that shouldn't be taken lightly. EDIT: Child is correct, I think liquidity traps are from macro, but same idea - not enough buyers, too many sellers.

domdip 12y ago
This is not called a liquidity trap. That's a concept in macro econ, it has nothing to do with trading or (this kind of) finance.
- pash 12y ago
  It's usually called a liquidity spiral. Brunnermeier and Pedersen's 2009 paper [0] is the standard reference. For a quick overview, see their slides [1] or Pedersen's summary for Vox EU [2]. As Pedersen emphasizes in the Vox article, the amount and price of funding available to participants in financial markets is intimately related to macro factors. So market liquidity, through the funding linkage, can dive along with the real economy. But liquidity can also evaporate due to endogenous factors, particularly when markets are set up so that the funding available to traders depends on the price of the asset being traded, e.g., through margin rules. That's what seems to have happened on BitFinex today. Positive feedback loops make for ill behaved markets. 0. http://pages.stern.nyu.edu/~lpederse/papers/Mkt_Fun_Liquidity.pdf http://pages.stern.nyu.edu/~lpederse/papers/Mkt_Fun_Liquidit... [PDF] 1. https://www.newyorkfed.org/registration/research/risk/pedersen_brunnermeier_slides.pdf https://www.newyorkfed.org/registration/research/risk/peders... [PDF] 2. http://www.voxeu.org/article/understanding-liquidity-risk-and-its-role-crisis http://www.voxeu.org/article/understanding-liquidity-risk-an...

driverdan 12y ago

What do other US citizens use to trade BTC with stop orders? I've been wanting setup an account to take advantage of short crashes like this but I'm not sure what exchanges are open to US citizens. And don't say BTCe, it must have transparency.

deleted 12y ago
[deleted]
domdip 12y ago
Be careful, stop orders only help if there is a reasonable amount of liquidity when you reach your stop price. If it's not there (and often isn't during a flash crash) you may get terrible execution.
ertdfgcb 12y ago
Bitfinex does shorts, which is similar I guess.
pmorici 12y ago
If you are in the US the easiest way to get money into an actual exchange seems to be by buying BTC via coinbase (they support ACH transactions for US citezens) and then transferring it to an exchange such as Coinsetter, Bitfinex, or Bitstamp to trade. Coinsetter is based in the US and will rebate you your Coinbase transaction fees.
eldavido 12y ago
That wouldn't be a stop, it would be a buy/limit order with a price far below (20-30%) the current market price.
- driverdan 12y ago
  Sorry, you are correct. I misspoke. Buy limits are what I want for purchases but really I want all standard order types.

PaulHoule 12y ago

I'd think you'd be insane to do anything involving debt or margin with bitcoins.

kordless 12y ago
Lots of 'insane' people in the world. Makes it interesting.
jafaku 12y ago
I'd think you'd be insane to miss an investment with such a disproportionate potential returns / risk.
j-g-faustus 12y ago
Can't agree with that. Betting say $1 on a highly improbable event can't really be considered "insane" by any metric I can think of - if you lose, so what, you're only out one dollar. The risk of the event itself doesn't matter; what matters for your personal risk is how much of your personal fortune you put into it. If losing a bet makes you homeless, it's hardly a good bet no matter how good the odds are. Conversely, there's barely an "insane" bet in the world as long as the probability for a payoff is greater than zero (excluding e.g. Nigerian scam emails), and as long as the amounts involved are small relative to your disposable capital and the payoff expectation. Think of it as "how many times do I need to place this bet before I win", vs "if I win, what's the payoff", vs "if I'm wrong, what's the most I could lose". If you get those numbers right, I can't see that bitcoin margin bets are intrinsically insane.

stygiansonic 12y ago

Margin calls were one aspect that magnified the magnitude of the 1929 stock market crash.[1] After that, margin regulations (Regulation T) made the minimum margin rate 50% for stocks, though it appears some brokers may have been increasing margin requirements to near this level before the 1929 crash.[2] 1. http://stocks.fundamentalfinance.com/stock-market-crash-of-1929.php http://stocks.fundamentalfinance.com/stock-market-crash-of-1... 2. https://en.wikipedia.org/wiki/Margin_call https://en.wikipedia.org/wiki/Margin_call

dnautics 12y ago
It's not just margin calls but leverage in general that turns downcycles into crashes, if you believe Kindleberger (and you should). [1] 1. http://www.amazon.com/Manias-Panics-Crashes-Financial-Investment/dp/0471467146 http://www.amazon.com/Manias-Panics-Crashes-Financial-Invest...

deleted 12y ago

[deleted]