{"id":10472,"date":"2023-03-03T14:46:05","date_gmt":"2023-03-03T14:46:05","guid":{"rendered":"https:\/\/www.bitnovo.com\/blog\/?p=10472"},"modified":"2022-05-17T08:09:32","modified_gmt":"2022-05-17T08:09:32","slug":"what-is-a-flash-crash-and-how-does-it-work","status":"publish","type":"post","link":"https:\/\/www.bitnovo.com\/blog\/en\/what-is-a-flash-crash-and-how-does-it-work","title":{"rendered":"What is a Flash Crash and how does it work?"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-transparent ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Alternar tabla de contenidos\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #ffffff;color:#ffffff\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #ffffff;color:#ffffff\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 eztoc-toggle-hide-by-default' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.bitnovo.com\/blog\/en\/what-is-a-flash-crash-and-how-does-it-work\/#how_does_a_flash_crash_work\" >How does a Flash Crash work?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.bitnovo.com\/blog\/en\/what-is-a-flash-crash-and-how-does-it-work\/#causes_of_a_flash_crash\" >Causes of a Flash Crash<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.bitnovo.com\/blog\/en\/what-is-a-flash-crash-and-how-does-it-work\/#human_causes\" >Human causes<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.bitnovo.com\/blog\/en\/what-is-a-flash-crash-and-how-does-it-work\/#computer_related_cases\" >Computer related cases<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<span class=\"span-reading-time rt-reading-time\" style=\"display: block;\"><span class=\"rt-label rt-prefix\">Tiempo de lectura:<\/span> <span class=\"rt-time\"> 4<\/span> <span class=\"rt-label rt-postfix\">minutos<\/span><\/span><p>In the world of cryptocurrencies it is very common to be aware of\u00a0<strong>the charts<\/strong>, that set of lines that show<strong>\u00a0the ups and downs<\/strong>. One of the most interesting phenomena we can find in these charts is\u00a0<strong>the Flash Crash<\/strong>. In this article we\u00a0<strong>will tell you all about this term and how it works<\/strong>.<\/p>\n<p>During the last few years,\u00a0<strong>the market has changed<\/strong>\u00a0significantly, changing important aspects of<strong>\u00a0its operation<\/strong>. This is due to new trends such as high-frequency trading or the\u00a0<strong>speculative<\/strong>\u00a0tendency of new investors.\u00a0<strong>Other factors such as the growth of investment funds, technological progress or market concentration are also involved<\/strong>, although these are<strong>\u00a0just a few examples<\/strong>.<\/p>\n<p>Due to the above examples, the market undergoes\u00a0<strong>changes<\/strong>\u00a0as time goes by.<strong>\u00a0Some changes are even spontaneous<\/strong>. That is why today we will focus on talking about what a Flash Crash is. These events are becoming more and<strong>\u00a0more common<\/strong>, however, many users still do not understand it.<\/p>\n<div class=\"is-divider divider clearfix\"><\/div>\n<div class=\"is-divider divider clearfix\"><\/div>\n<div class=\"is-divider divider clearfix\"><\/div>\n<h2><span class=\"ez-toc-section\" id=\"how_does_a_flash_crash_work\"><\/span><strong>How does a Flash Crash work?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>A flash crash occurs when the\u00a0<strong>price<\/strong>\u00a0of an asset, in this case,\u00a0<strong>a cryptocurrency, suddenly decreases in a very<\/strong>\u00a0short period of time and then quickly recovers. Each investor sees it in a different way, that is. some investors see it as a\u00a0<strong>solution<\/strong>, and others as a\u00a0<strong>loss<\/strong>. In this process acts what we call\u00a0<strong>volatility<\/strong>.<\/p>\n<p>Volatility is a concept we see all the time, especially in the cryptocurrency market. This is because volatility directly\u00a0<strong>influences<\/strong>\u00a0cryptocurrency\u00a0<a href=\"https:\/\/www.bitnovo.com\/blog\/en\/why-has-your-interest-increased-in-recent-years\/\">trading<\/a>. However, sometimes this volatility translates into simple\u00a0<strong>fluctuations<\/strong>\u00a0in asset\u00a0<strong>prices<\/strong>.<\/p>\n<p>A flash crash, on the other hand,\u00a0<strong>begins and ends<\/strong>\u00a0before most investors can realize that the event has taken place. This is because it usually lasts only\u00a0<strong>a<\/strong>\u00a0<strong>few minutes or seconds<\/strong>.<\/p>\n<p>When this event occurs, the affected assets usually\u00a0<strong>recover<\/strong>\u00a0most of their lost value\u00a0<strong>immediately<\/strong>. They vary greatly depending on<strong>\u00a0how long they last<\/strong>, but are generally considered an extreme of what we call a\u00a0<strong>volatility burst<\/strong>. However,<strong>\u00a0the large amount of money lost<\/strong>\u00a0by investors and the causes that have led to these events suggest more than just a volatility burst.<\/p>\n<p>Let\u2019s look at it another way. A flash crash is\u00a0<strong>a noticeable and momentary change in the price of an asset<\/strong>, but it does not necessarily mean\u00a0<strong>a decline and increase in a price<\/strong>, it can be just the\u00a0<strong>opposite<\/strong>.\u00a0<strong>Prices can increase rapidly<\/strong>\u00a0before\u00a0<strong>falling back<\/strong>\u00a0to their previous value. Most of the time it is the other way around, but we must keep this in mind.<\/p>\n<p>We can also find this happening in\u00a0<strong>trades between pairs<\/strong>, that is, if we have two currencies and<strong>\u00a0the price of one currency plummets<\/strong>\u00a0due to a flash crash\u00a0<strong>it can result in the price of the other currency rising.<\/strong><\/p>\n<p>To better understand what causes a flash crash, the first thing to do is to know its\u00a0<strong>causes<\/strong>. Below we will see the most common ones and explain how they originate.<\/p>\n<div class=\"is-divider divider clearfix\"><\/div>\n<div class=\"is-divider divider clearfix\"><\/div>\n<div id=\"image_1976234256\" class=\"img has-hover x md-x lg-x y md-y lg-y\">\n<div class=\"img-inner dark\"><img fetchpriority=\"high\" decoding=\"async\" class=\"attachment-large size-large lazyloaded\" src=\"https:\/\/www.bitnovo.com\/blog\/wp-content\/uploads\/2021\/07\/JUNIO-28-A-1_FLASH-CRASH-1.jpg\" sizes=\"(max-width: 768px) 100vw, 768px\" srcset=\"https:\/\/www.bitnovo.com\/blog\/wp-content\/uploads\/2021\/07\/JUNIO-28-A-1_FLASH-CRASH-1.jpg 768w, https:\/\/www.bitnovo.com\/blog\/wp-content\/uploads\/2021\/07\/JUNIO-28-A-1_FLASH-CRASH-1-300x205.jpg 300w\" alt=\"FLASH CRASH\" width=\"768\" height=\"526\" data-srcset=\"https:\/\/www.bitnovo.com\/blog\/wp-content\/uploads\/2021\/07\/JUNIO-28-A-1_FLASH-CRASH-1.jpg 768w, https:\/\/www.bitnovo.com\/blog\/wp-content\/uploads\/2021\/07\/JUNIO-28-A-1_FLASH-CRASH-1-300x205.jpg 300w\" data-src=\"https:\/\/www.bitnovo.com\/blog\/wp-content\/uploads\/2021\/07\/JUNIO-28-A-1_FLASH-CRASH-1.jpg\" data-sizes=\"(max-width: 768px) 100vw, 768px\" \/><\/div>\n<\/div>\n<div class=\"is-divider divider clearfix\"><\/div>\n<p>&nbsp;<\/p>\n<div class=\"is-divider divider clearfix\"><\/div>\n<h2><span class=\"ez-toc-section\" id=\"causes_of_a_flash_crash\"><\/span><strong>Causes of a Flash Crash<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<div class=\"is-divider divider clearfix\"><\/div>\n<p><strong>There are many reasons<\/strong>\u00a0that can lead to this happening in the market and the culprits\u00a0<strong>can be people or even the computers<\/strong>\u00a0themselves.<\/p>\n<div class=\"is-divider divider clearfix\"><\/div>\n<div class=\"is-divider divider clearfix\"><\/div>\n<h3><span class=\"ez-toc-section\" id=\"human_causes\"><\/span>Human causes<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Many times a flash crash is due to\u00a0<strong>human error.<\/strong>\u00a0Many of the crashes have had to do with some kind of\u00a0<strong>accidental trading<\/strong>. For example, let\u2019s imagine that we are an investor or a manager who is about to make a purchase and sale of cryptocurrencies. It may be the case that\u00a0<strong>when establishing the amount we make a mistake and add a zero extra<\/strong>\u00a0which would end up in an involuntary variation in the transaction that can\u00a0<strong>affect the\u00a0<a href=\"https:\/\/www.bitnovo.com\/blog\/en\/what-is-a-market-order\/\">market price<\/a><\/strong>. This accident is much more common than we imagine and is called \u201c<strong>fat finger error<\/strong>\u201c. Not only can we make a mistake\u00a0<strong>by putting one 0 extra<\/strong>, we can also\u00a0<strong>mistakenly set the\u00a0<a href=\"https:\/\/www.bitnovo.com\/blog\/en\/what-is-market-capitalization-its-use-in-crypto\/\">buy or sell price<\/a>.<\/strong><\/p>\n<p>There are other human reasons that influence a<strong>\u00a0flash crash<\/strong>. These are the deliberate attempts of many traders to\u00a0<strong>manipulate<\/strong>\u00a0the cryptocurrency market through f<strong>raudulent and illegal methods<\/strong>. An example of this is the\u00a0<strong>method known as \u201cspoofing\u201d or \u201cdynamic layering\u201d<\/strong>.<\/p>\n<p>This occurs when a user places\u00a0<strong>large\u00a0<a href=\"https:\/\/www.bitnovo.com\/blog\/en\/what-is-a-market-order\/\">sell orders<\/a><\/strong>\u00a0at a price completely\u00a0<strong>different<\/strong>\u00a0from the current market value and then\u00a0<strong>cancels<\/strong>\u00a0the order before the asset reaches the price stated in the order. Such an action results in the<strong>\u00a0illusion<\/strong>\u00a0that a<strong>\u00a0large sell off<\/strong>\u00a0is occurring and causes all other users to sell their cryptocurrencies for fear of a\u00a0<strong>drop in prices<\/strong>.<\/p>\n<p>All these sudden sales provoke a great<strong>\u00a0imbalance<\/strong>\u00a0between the sell and buy orders causing an\u00a0<strong>amplification<\/strong>\u00a0in the fall. Of course, the same user who caused the massive sale, has set another buy order for the same value sold at a much\u00a0<strong>lower price<\/strong>\u00a0than the one set by the market, but he never manages to sell while, by cheating, he manages to buy at a\u00a0<strong>lower price<\/strong>\u00a0the assets.<\/p>\n<p>This mismatch, taken to the chart that would represent a\u00a0<strong>flash crash<\/strong>, translates into the user buying at\u00a0<strong>the bottom of the flash crash<\/strong>\u00a0and then\u00a0<strong>selling the asset at a considerably high price<\/strong>\u00a0after the recovery. In this way, large profits are made in a matter of\u00a0<strong>seconds<\/strong>.<\/p>\n<div class=\"is-divider divider clearfix\"><\/div>\n<div class=\"is-divider divider clearfix\"><\/div>\n<div class=\"is-divider divider clearfix\"><\/div>\n<h3><span class=\"ez-toc-section\" id=\"computer_related_cases\"><\/span>Computer related cases<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>In recent years,\u00a0<strong>the role of computers in trading<\/strong>\u00a0has increased significantly and has therefore become one of the main causes of flash crashes. These causes repeatedly involve\u00a0<strong>software failures<\/strong>. These faults can lead to data\u00a0<strong>not being communicated correctly<\/strong>\u00a0between exchanges, which can result in\u00a0<strong>inaccurate prices being applied<\/strong>\u00a0to the value of an asset.<\/p>\n<p>Another cause is\u00a0<strong>the increase in trading volume<\/strong>\u00a0and, above all, in\u00a0<strong>high frequency<\/strong>\u00a0trading in recent years. To introduce a computer into the world of trading, it needs to be remarkably\u00a0<strong>fast<\/strong>\u00a0and based on<strong>\u00a0pre programmed algorithms<\/strong>. These algorithmic programs prepare the computer to be able\u00a0<strong>to sell or buy<\/strong>\u00a0assets when the market varies,\u00a0<strong>offering profits or avoiding losses<\/strong>.<\/p>\n<p>Because of these computers, in the event of<strong>\u00a0a price decline<\/strong>,<strong>\u00a0sell orders<\/strong>\u00a0are triggered which\u00a0<strong>cause another decline<\/strong>\u00a0and so on. However, these computers also influence the\u00a0<strong>recovery<\/strong>\u00a0from a flash crash as well as its\u00a0<strong>fall<\/strong>. This is because\u00a0<strong>in the event of a price decline<\/strong>, many computers are programmed to\u00a0<strong>make massive purchases<\/strong>\u00a0<strong>of assets<\/strong>, which causes prices to\u00a0<strong>rise again<\/strong>\u00a0and leads to the\u00a0<strong>recovery<\/strong>\u00a0from the flash crash.<\/p>\n<p>It is worth noting that according to some observations, a flash crash usually occurs when there is<strong>\u00a0low trading volume<\/strong>. This is because liquidity is low and\u00a0<strong>the market becomes more susceptible to manipulation<\/strong>, that is, with a few high volume orders,\u00a0<strong>prices can be affected.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p><span class=\"span-reading-time rt-reading-time\" style=\"display: block;\"><span class=\"rt-label rt-prefix\">Tiempo de lectura:<\/span> <span class=\"rt-time\"> 4<\/span> <span class=\"rt-label rt-postfix\">minutos<\/span><\/span>In the world of cryptocurrencies it is very common to be aware of\u00a0the charts, that set of lines that show\u00a0the ups and downs. One of the most interesting phenomena we can find in these charts is\u00a0the Flash Crash. In this article we\u00a0will tell you all about this term and how it works. During the last [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":7864,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[185],"tags":[],"class_list":["post-10472","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blockchain-en"],"_links":{"self":[{"href":"https:\/\/www.bitnovo.com\/blog\/wp-json\/wp\/v2\/posts\/10472","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.bitnovo.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.bitnovo.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.bitnovo.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.bitnovo.com\/blog\/wp-json\/wp\/v2\/comments?post=10472"}],"version-history":[{"count":0,"href":"https:\/\/www.bitnovo.com\/blog\/wp-json\/wp\/v2\/posts\/10472\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.bitnovo.com\/blog\/wp-json\/wp\/v2\/media\/7864"}],"wp:attachment":[{"href":"https:\/\/www.bitnovo.com\/blog\/wp-json\/wp\/v2\/media?parent=10472"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.bitnovo.com\/blog\/wp-json\/wp\/v2\/categories?post=10472"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.bitnovo.com\/blog\/wp-json\/wp\/v2\/tags?post=10472"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}