Bitcoin: Two reasons why flash crashes aren’t as severe as they seem

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While 2021 is expected to be a strong year for the cryptocurrency market, Bitcoin has had six flash collapses in the last eight months. Simply put, 6 times in the last 8 months, traders faced large liquidations and the dread of a trend reversal on the charts.

When it comes to flash crashes, it’s seldom easy to tell whether the repairs will be long-term or only temporary. They always have the same effect on market critics, though. They discount the digital industry’s trustworthiness only on the basis of instability.

However, if these flash crashes are fundamentally broken down, most of these were momentary corrections. They did not disrupt the rally or on-chain metrics of Bitcoin.

Flash Crash history of Bitcoin in 2021

The linked chart depicts all eight flash crashes that occurred in 2021. It is worth noting that the majority of these crashes occurred following a consistently strong rally for Bitcoin. The first two large declines simply resulted in a new high for Bitcoin later on.

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The flash crashes were more damaging in Q2 of 2021, as the valuation fell below its immediate support levels.

Despite this, the asset continued to provide positive ROIs on a weekly basis throughout the year. This is despite the fact that the market is experiencing another flash fall after 5 weeks of bullish climb.

What we’re attempting to say is that while flash collapses appear frightening on daily or hourly charts, they have no long-term impact on larger patterns. The market dynamics were more tumultuous in 2017, while the turmoil is more calculated and controlled in 2021.

Accounting for trouble with leverage?

The use of leverage is another important component that reveals the proclivity of flash collapses. With increased interest, Bitcoin and Ethereum Futures contracts are being used with increasing leverage, essentially amplifying the amount of risk.

Historically, crypto-futures markets have allowed for a high level of leverage on these crypto-futures. Now, an increase in Open Interest for Futures contracts is also a useful indicator of market sentiment. They do not, however, represent the long-term picture.

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As a result, when overleveraged markets are liquidated, the crash is frequently swift and severe. In the near term, such crashes are excruciatingly unpleasant. They do, however, clear out riskier contracts and return funding rates and liquidity to more normal levels.

As a result, while flash crashes have a dramatic impact on prices, they do not undercut increasing fundamentals such as adoption rates or rising interest rates.

 

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