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Bitcoin drops to $309, then recovers

A chart from BTC-e showing the flash crash of the BTC/USD exchange rate on Aug. 18, 2014.
A chart from BTC-e showing the flash crash of the BTC/USD exchange rate on Aug. 18, 2014.
Own work

On Aug. 18 between 7:42 and 7:44 a.m. EDT, the exchange rate between Bitcoins and US dollars on BTC-e briefly dropped all the way to $309 from a local maximum of $472 just a few minutes earlier. In the hours following the drop, the exchange rate quickly recovered to nearly its value before the sudden crash.

The drop was caused by the selling of about 7,500 Bitcoins at once. Before the “flash crash,” they were valued at $3.54 million. Data from the cryptocurrency market analytics website Tradeblock indicates that three trades were executed at $309, with another two dozen trades at $310. Over 1,500 trades were executed between $400 and $309 in a pattern that is consistent with automatic trading carried out by bots. Bots have been blamed for price manipulations in the past, such as the peak exchange rate of over $1,200 per Bitcoin that occurred at the now-defunct Mt. Gox in December 2013. This is also not the first downward spike at BTC-e; a similar but more serious event occurred in February, when the exchange rate suddenly crashed from $677 to $102 then recovered in a matter of hours.

Other exchanges did not experience the “flash crash,” but did drop significantly once traders saw the events on BTC-e. About an hour after the BTC-e drop, Bitstamp dropped to $442, Bitfinex dropped to $443, and Huobi dropped to the equivalent of $448 before recovering later in the day.

It is not known whether the crash was perpetrated by a trading bot or a human trader acting directly. It is entirely possible that someone meant to create a large sell wall at $600 and mistakenly typed a three rather than a six on the number pad of a keyboard. On BTC-e, there is no script that asks a user to confirm a buy or sell order and there is no way to delay an order until a certain time or exchange rate is reached, so there is no way to undo such a mistake once it is made. Thus, a user who simply wished to wait to sell 7,500 Bitcoins for $4.5 million (or just discourage the exchange rate from trying to exceed $600 per Bitcoin) could have easily dumped them by mistake at $300 each, thereby filling all buy orders from $472 down to $309. It is also possible that an investor simply wanted to cash out, noting that Bitcoin exchange rates have been falling steadily since a local maximum of $585 on Aug. 10.