Crypto Flash Crash: What Caused Friday's Collapse

The crypto market took an absolute nosedive at 8:30 a.m. ET on Friday after the stock market opened. Bitcoin (CRYPTO: BTC) has fallen over $4,000 in value to $66,440 as of 3:15 p.m. ET, Ethereum (CRYPTO: ETH) is off 9% over the same time to $3,216, and Dogecoin (CRYPTO: DOGE) plunged 14.2%.

While the decline started early on Friday, it accelerated around noon ET -- that's when small declines became double-digit losses for many cryptocurrencies.

There weren't any major news items out of the crypto world today, but this kind of volatility can often hit at the end of the week or on the weekend. And for the first time in a while, that's what we got today.

There wasn't a lot of good news for cryptocurrencies this week. Hotter-than-expected inflation reported earlier this week caused an increase in interest rates and a drop in tech and growth stocks, which have all traditionally correlated with falling crypto values. It just took a while for the market to process the news.

We also had the U.S. Securities and Exchange Commission (SEC) issue a Wells notice to Uniswap, which is a precursor to legal action against the cryptocurrency. The market has been fighting to get clarity around what's legal and what's not, but the SEC has chosen legal actions against high-profile counterparties like XRP and Coinbase. Yet the SEC has also lost most of those battles, so it's not clear what the outcome of the latest ones will be.

With a lack of regulatory clarity, it's not surprising that some investors have chosen to take profits at a market peak.

When a crash starts, it can be accelerated by the leverage in the crypto market. Not only do traders have leveraged positions, but the liquidity can also decline as the week ends, which could have exacerbated the situation on Friday.

According to Coinglass.com, there have been $668 million in long positions liquidated in the past four hours alone. Liquidations aren't unusual, but normally they're limited to a few hundred million dollars per day, not that level in just a few hours.

What's unique about this crash is the breadth. Not only are Bitcoin, Ethereum, and Dogecoin down, but smaller tokens are falling much more.

The crypto market has always been volatile, but this is an abnormally large decline. It's not clear what will stop it.

Over the past few months, the market has benefited from billions of dollars of inflows to Bitcoin ETFs, which has caused speculators to lead the way and leverage to magnify moves. That's great on the way up, but if the trend reverses it could be terrible for crypto values.

I'm cautious about the short-term price moves in cryptocurrency because I think investors will be looking for safer investments as interest rates rise and earnings season begins. But this weekend may be the start of an especially volatile period for the industry.

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Travis Hoium has positions in Coinbase Global and Ethereum. The Motley Fool has positions in and recommends Bitcoin, Coinbase Global, Ethereum, Uniswap Protocol Token, and XRP. The Motley Fool has a disclosure policy.

Crypto Flash Crash: What Caused Friday's Collapse was originally published by The Motley Fool