- Bitcoin flash crashed to $43,000 on Tuesday as El Salvador legalized it for payments.
- Experts explained that the drop was largely driven by the liquidations on the derivative market.
- Regardless, on-chain data are still bullish suggesting the uptrend may continue.
In what could be seen as wrong timing, the largest cryptocurrency, Bitcoin flash crashed on Tuesday, the same day the government of El Salvador officially pronounced it as a legal tender. Not just Bitcoin, major altcoins, including Ether, Binance Coin, and Solana, etc., took a hit, which resulted in a significant amount of crypto liquidations in the derivative market.
Reasons Bitcoin flash crash on Tuesday
The price of Bitcoin dropped by over 11 percent from a high of $51,101 to $45,299 according to Coingecko. However, major exchanges such as Binance and Coinbase recorded as low as $42,900. Overall, the Bitcoin flash crash resulted in an 11.6 percent drop in whole crypto market capitalization, to $2.16 billion.
Firstly, it’s worth noting that the incident came as a reminder of how volatile Bitcoin and other cryptocurrencies are. The market value of digital currencies can significantly increase or decrease at any given time. Besides market volatility, there were talks that the news El Salvador will legalize Bitcoin on September 7, was already priced in.
People believed Bitcoin was going to increase following the news around El Salvador adoption and the crypto community’s plan to also buy $30 worth of Bitcoin. Hence, some traders had placed sell orders to lock in quick profits as Bitcoin rose.
Experts say $3.7B liquidations caused Bitcoin flash crash
According to crypto experts, however, the major factor behind the Bitcoin flash crash was the massive amount of positions liquidated on Tuesday. The sell-offs on the spot market were huge enough to cause a cascade of liquidations on the derivative market of over $3.7 billion. As much as $1.3 billion Bitcoin long positions were liquidated.
The liquidations further drove down the price of Bitcoin to the lows recorded at the time. This is evident as there weren’t any significant inflows to exchanges to suggest massive sellings on the spot market.
“The last sel-loff was triggered by the massive liquidations with an aggregate losses of about $ 3 billions. Infact if we analyze the Exchange spot reserves, find out that we are at local lows,” an analyst at CryptoQuant (@Cristoff) explained.
Many other crypto analysts, including Willy Woo and Will Clemente, shared the same sentiment, adding the liquidation was a healthy cleansing for the Bitcoin market.
What’s next after the Bitcoin flash crash?
The Bitcoin flash crash isn’t the end of the bull market, according to Clemente. Many on-chain data are still bullish. Long-term holders’ positions increased as the market dropped. There is still no sign of crazy inflows to exchanges, which is bullish. However, it remains unknown how soon Bitcoin will resurge back to the $50,000 price level.
At the time of writing, the leading cryptocurrency was trading at $45,728 on CoinMarketCap.