Flash crash

A flash crash starts when selling overwhelms the bids near the current price. In crypto, the trigger can be a large market order on a thin book, a news shock, an exchange glitch or the forced closure of leveraged positions. Each liquidation adds more market selling, which pushes the price into the next cluster of liquidations, and the drop feeds on itself until buyers return.

Crypto has had many flash crashes, some on a single exchange and others market-wide. Isolated crashes can send one pair to a fraction of its value on one venue for seconds while others are unaffected, and oracle-dependent DeFi protocols and derivatives platforms can liquidate users based on those wicks. Market-wide events have erased billions of dollars of leveraged positions in a few hours.

Prices often recover much of the drop quickly, but leveraged traders who were liquidated do not get their positions back. Stop-market orders can fill far below their trigger during a crash, and some exchanges have reversed trades or compensated users after technical failures.