A Flash Crash in the context of cryptocurrency is a rapid market event where the price of a crypto asset drastically falls within a very short timeframe, often followed by a quick rebound to near its original level. This phenomenon is characterized by the suddenness of the price drop and the equally rapid recovery, differentiating it from a standard market crash.
Several factors can trigger a flash crash. It might be the result of heavy selling by a single large player or numerous investors simultaneously, leading to panic selling. Additionally, algorithmic trading programs can inadvertently create a feedback loop of selling, exacerbating the crash. External factors such as technical glitches, market manipulation tactics by major investors (whales), or significant news events impacting sentiment can also contribute to a flash crash.
In the crypto market, the inherent volatility of digital currencies makes them particularly susceptible to flash crashes. These can occur within minutes or hours, causing dramatic shifts in prices. The aftereffects may include a cascade of liquidations in the futures market, adding further downward pressure.
Flash crashes are not exclusive to cryptocurrencies and have occurred in other financial markets, including stocks and bonds. In these instances, factors such as algorithmic trading and market manipulation have similarly been implicated. The rapid recovery often observed following a flash crash is attributed to investors seizing the opportunity to buy undervalued assets, leading to a swift price correction.