Lessons From The Flash Crash Liquidation (April 2021)

So what is really going on with the market?


Vincent T

3 years ago | 4 min read

Bitcoin (BTC) has experienced a massive dump on early Sunday morning (April 18, 2021). The crypto king dropped close to $10,000 in price from around $60,000 to a low of $50,900 (Binance). The level of support did hold and not break further to the downside, but no one is out of the woods yet.

This also created a domino effect, which is quite expected, with the rest of the cryptocurrency market. The prices of Ethereum (ETH), Binance Coin (BNB), XRP, and other altcoins dropped along with BTC. ETH saw a total of $1.16 Billion in losses, while XRP losses totaled $496 Million. Traders who wanted to cut their losses exited to stablecoins like USDT and USDC.

It was leveraged traders who suffered the most, according to reports. 1 million trader accounts lost a total of $10 Billion from liquidations as a result of the deep pullback. Most of the liquidations were long positions on BTC using leverage.

The aftermath was bloody across the cryptosphere, and many crypto influencers and enthusiasts wanted to know the reason why prices suddenly plunged. If you are new to the space, you would be the most curious, but those who have been in crypto know that crashes like these occur frequently and without any warning.

Leveraged Trading

Unless you are an experienced trader with enough capital, leveraged trading should be avoided. When you borrow capital from brokerages or exchanges to trade, you must pay it back.

Establishing a position with BTC, whether long or short, is how traders use leverage. The problem is if things don’t go their way, it will mean a loss and paying back what needs to be covered.

The trade is liquidated when it equals the loss of that position. Traders who are bullish can establish a long position in the hope that their leverage trade will go up in value. What happened on Sunday was when BTC prices dropped, the traders were at a loss, so their positions had to be liquidated.

Those who do leveraged trading must be aware of the pitfalls. The rewards are great, but managing risk is required. Some exchanges like BitMEX allow traders to use up to 100X leverage. That is basically money that you don’t own to purchase something you don’t have.

That is the risk involved when engaging in this type of trading, and this does have regulators worried. However, if you are aware of the risk and willing to trade, there is no one else to blame here but yourself. Leverage is like gambling in some ways since you are betting for prices to go your way. If you long, then you expect prices to surge. When you short, you expect it to drop, so you sell off early and pay back at profit.

What Happened On Sunday?

There have been reports that whales sold off BTC ($4 Billion in movement) to some concerning sentiments that the bull market is at its end. It could also be a form of market manipulation that when traders don’t want prices to go up too high so they can buy more and accumulate.

There was also news that a drop in hash rate occurred due to power outages in China. There have been other news which I will not go over, but it seems there is a bearish sentiment at the moment.

So what is really going on with the market?

There are plenty of explanations, but no definite answer. Corrections like these are quite normal though. This is not the first time that it has happened, things have been much worse. Bitcoin fell by as much as 65% between January and February 2018. A drop of 30% to 40% is far less worse and usually signals higher highs are about to come (with a grain of salt).

The market needs to recover, and that is part of a cycle. When prices go up, they don’t continue going up forever. People will collect profits along the way, and that is understood.

If you don’t take profits, someone else will. This activity leads to a dip that then becomes a buying opportunity for those who want to enter the market. It continuously repeats as a cycle, so the HODLers out there who stick to the fundamentals understand that so they don’t panic and sell.

Looking Ahead

Prior to the flash crash, BTC reached an all-time high close to $65,000. It does make sense that there are people who wanted to collect their profits. That is a reasonable explanation of why these incidents occur.

Critics will then say that all this volatility is the reason BTC is a bad store of value. They will then say that it is like newcomers are bag holders for the previous investors, and when a dump comes, they will be left dry.

That reasoning is not based on fundamentals but more on speculation. Looking at the fundamentals of Bitcoin is totally based on beliefs, so there are those who will hold on to BTC regardless of what is happening in the market.

The institutions that recently got in are probably going to buy more BTC since prices have dipped. As the price of BTC increases, the idea is that it becomes less volatile and a better store of value.

The takeaway here is that when prices go up, like what we saw in the past few weeks, they don’t go up forever. If you leverage trade expecting things to continue on the upside, think again.

Manage your risk and be careful with over-leveraged long positions. It sounds too good when you are offered $20,000 for a $10,000 trade, but that is only if the prices go up.

There are those who will bet against your position in the hope that prices drop and you get liquidated or sell off. This is like a gamble and not part of the fundamentals at all. Otherwise, HODL what you already have because you don’t lose anything. If you had 100 BTC before the crash and did not sell or trade on leverage, you still have 100 BTC.


Created by

Vincent T

Involved in blockchain development and imaging technology.







Related Articles