A flash crash is a scenario that occurs in different financial markets, from the crypto market to the stock market. It is a condition where the value of an asset plummets quickly within a short period and usually rebounds to the past value within the same length of time.
As a result of the volatility of the crypto market, a flash crash can occur in minutes or hours. One reason that this occurs is because of high-frequency trading.
When a flash crash occurs, people may panic and sell off their crypto holdings or even stocks. At the end of the day, the price tends to rebound, making it look like nothing extraordinary had happened that day.
This scenario is worsened by the aberrations in the crypto market such as high-frequency traders selling their tokens.
When this occurs, the trading software used by other traders may automatically react to this scenario and start selling a large number of tokens quickly to prevent their users from making massive losses.
The stock market has also suffered from this disastrous scenario, and an example was the one that hit the New York Stock Exchange in July 2015. This stopped trading activities for a few hours.
The crypto market also has some examples. In 2021, Bitcoin was faced with a flash crash that ended up with $310 billion being removed from the crypto market. This led to Bitcoin liquidations that reached $10 billion worth of BTC.
The reason for this blackout was that the region that held some of the largest BTC farms witnessed a power blackout. During that period, the Xinjiang region in China faced a massive blackout that led to over fifty percent of the Bitcoin network being offline.
There are different reasons a flash crash can occur in financial markets.