Explained: How bitcoin market sell orders cause flash crashes

Although it might technically be true that a sufficiently large market sell order on a particular trading pair could temporarily crash that pair’s bitcoin price, this bearish rhetoric is often overreaching. In reality, bitcoin has the deepest depth of market for any crypto asset in the world. Moreover, traders update bids across markets within fractions of a second thanks to arbitrage and multi-exchange software.

Take, for example, a fear-mongering claim that a $4 million market sell order on Curve Finance’s BTC/USDT trading pair would “crash” the price of bitcoin 20%.

While this claim was technically true, in practical terms, it is in fact meaningless. For a fraction of a second, the final fill of a $4 million market sell order on that particular pair would have printed at a “flash crash” price.

However, that price would have been anomalous and isolated. Bitcoin trades across thousands of spot and derivative trading pairs on hundreds of centralized and decentralized exchanges and flukes occur when traders make mistakes. For example, the price of bitcoin briefly traded above $56,000 on a Bitfinex trading pair on May 2, 2023, only to revert back to the global average seconds later.

Flash rallies and crashes are often the results of inadvertent, so-called ‘fat finger’ trades when an absent-minded customer hits the wrong button on a keyboard.

Moreover, the price of bitcoin — the multi-hundred billion dollar asset itself — isn’t meaningfully measured by its last trade on any particular pair. Instead, sophisticated index providers like Bloomberg, CME Group, Galaxy Digital, Brave New Coin, CF Benchmarks, or Refinitiv convene sophisticated committees to tweak index methodologies to quote a clean average from the world’s exchange data.

For example, consider an Amazon customer asking Alexa, “What’s the price of bitcoin?” Alexa cites a dollar figure using the Bitcoin Liquid Index, an institutional reference rate served to partners like Amazon and NASDAQ. This price is far closer to the real price of bitcoin than any particular trading pair’s last print.

Looking at bitcoin market sell orders on DEXs

Nevertheless, it might be instructive for the average reader to see the impact of a market sell order on the price of individual bitcoin trading pairs. 

To that end, below are a few examples of the slippage that a trader could have expected to incur on three DEXs — Curve, Uniswap, and Balancer — as of midnight in Chicago on the morning of June 2, 2023.

Market selling $10 million of wrapped bitcoin (WBTC) for Tether on Curve would have flash crashed that particular pair by -12%. On Uniswap, the same sale would have flash crashed that particular pair by -2%, and on Balancer it would have flash crashed it by -1%.

Adding a zero to those sale orders would nearly exhaust the depth of market on either exchange. Market selling $100 million of WBTC for Tether on either Curve or Uniswap would have flash crashed by -59%. Balancer had more depth of market and would have suffered only -10% slippage.

Other venues are much smaller. Liquidity on SushiSwap, for example, was minimal. A $10 million order would have flash crashed that price of bitcoin by -47%, and a $100 million order would have incurred -90% slippage.

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Bitcoin absorbs billions of dollars in market sell orders every day

These are just a few examples of the types of orders that would affect the price of a single trading pair. Even if a flash crash occurred on any of these pairs, it might not necessarily have a material impact on the pricing of other markets for bitcoin.

Moreover, digital asset traders are moving bids faster every day. Sophisticated liquidity providers, multi-exchange software, and cross-exchange arbitrageurs allow traders to place new bids for bitcoin within fractions of a second.

In total, the daily trading volume of bitcoin is enormous. Exchange-reported estimates sum over $14 billion. Stated another way, global demand for bitcoin absorbs billions of dollars worth of market sell orders, every single day. Obviously, a $4 million order that might flash crash the price of one trading pair won’t pull down bitcoin’s global depth of market with billions of dollars in deep liquidity.

The bearish rhetoric of claiming that a $4 million market sell order could crash the price of bitcoin by 20% is simply wordplay. Such a fill might print an anomalous price on one pair on one exchange, but bitcoin trades $14 billion every day across thousands of venues that aren’t so easily swayed.

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