Times are tough.

Everything from Bitcoin to sh*tcoin has tanked. Truthfully, the economy as a whole seems to be taking a hit. Is a recession on the rise? How long will—or can—crypto continue to plummet? 

Many questions arise after a crypto flash crash. Downward spirals are never easy to stomach, but they are a very real and recurring factor. In this article, we’ll explore common causes of a crypto flash crash, past examples, and what you can likely expect next.  

A crypto flash crash is when a very rapid price decline occurs; resulting in a sudden sell-off. 

Many times, brutal liquidations follow with a quick recovery. However, some losses bear a much longer comeback.  

Unfortunately, crashes are not one-off instances—especially in crypto. Dramatic price swings can happen in a matter of minutes, and they regularly do. 

So, what’s the cause behind these monumental market events? Better yet, is there even one at all? Sometimes, there is truly no rhyme or reason behind a crypto crash. And other times, a series of events can be to blame.  

Black swan events 

Unexpected events that have a major impact are sometimes dubbed a “Black Swan”. They are near impossible to predict and result in very severe consequences. Experts usually attempt to justify the events after the fact, or in hindsight.

The dotcom bubble, the 2008 U.S. housing crash, and the 9/11 terrorist attacks are a few notable examples of the theory at play. These very rare occurrences are known for their large magnitude and dominant role in history. No market is immune—including crypto. 

Many are calling the recent collapse of the Terra network a black swan event. 

The once-promising project was brought to runes in a crypto flash crash, and nearly $40B was lost in a mere matter of days. The impact spilled over to the entire crypto market. BTC dropped roughly $10,000 in the span of a few hours and many coins suffered double-digit losses. 

Could one have predicted the risks of an algorithm stablecoin? In hindsight, one may say so. Or maybe that's simply the theory talking.

Black swan events will likely continue to happen in crypto. After all, it is an unregulated, volatile market. But not every crash will gain the right to be called a black swan. In fact, many violent price swings are the direct result of specific market events. 

Macroeconomics

Large-scale or general economic events are often thought to contribute to crypto flash crashes. 

On the financial side, this can include reports of rising interest rates and inflation. Such information is a likely indicator of the health of the economy. If/when reports fall below average, the negative news traditionally carries over into the markets and vice versa. 

War / Historic Crisis 

Historic events, such as war, are also known to correlate with extreme market fluctuations. 

When Russia invaded Ukraine in February of 2022, panic ensued across the global markets and crypto took a major hit. Within hours, crypto saw roughly $242M in liquidations. The chaos continued as both countries leaned heavily on digital assets; Russia to evade sanctions and Ukraine for relief. 

COVID-19 also fueled market volatility. Crypto was initially thought of as a safe haven during the first wave of the pandemic. However, as travel bans and new variants surfaced, the crypto markets began to feel the impact. When the Omicron variant emerged, the market responded with rapid sell-offs and more than $750M of crypto liquidations. 

News / Sentiment 

Worldwide events are not the only factor influencing a crypto flash crash. The News can—and does— play a major role in swaying public perception. 

It’s a concept referred to as market sentiment or analyzed using the fear & greed index. Whichever way you spin it, the crypto market behavior is very emotional. 

Crypto traders often fall subject to FOMO (Fear of missing out) when the markets are on the rise. Likewise, FUD (Fear, uncertainty, and doubt) work on the reverse end and can trigger crypto sell-offs.

What happens next?

When a crypto flash crash unfolds, traders are left wondering what to expect next. It’s quite likely a correction will follow, however, it’s anyone’s guess how long that could take. 

In some cases, significant crashes can be indicators of a bear market. During this period, supply is greater than demand and prices are on the decline. 

How long a bear market could last remains a million-dollar question. Regardless of the conditions, traders should continue to do their research and act accordingly to their own investment strategies.

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