Coins Can Go Up on a Flash Crash

by Bruce Ng
By Bruce Ng

The Ledger hack last Thursday caused Bitcoin (BTC, “A”) to crash momentarily, as shown in the chart below.

We immediately issued an alert regarding the hack here. The situation has since been resolved but to really be safe, make sure to clear your browser cache when you want to use your wallet with any web3 platforms. 

Basically, if you’re using a platform that asks you to connect your crypto wallet, be sure you clear your cache and cookies then hard refresh your browser before doing so.

But I’m not interested in breaking down the hack. Others have already done so, and there’s little left to be said. 

Today, I’m more concerned with unpacking the price action that occurred because of the flash crash. And the direction of said action may surprise you.

Let’s start with the obvious choice, Bitcoin.

Figure 1: BTC/USDT. Source: TradingView. Click here to see full-sized image.

 

In a manner of minutes, BTC dropped from $43,101 to $41,400. But over the next four hours, BTC’s price recovered back to the $43,000 level. 

That’s not anything unusual.

What was remarkable was how this flash crash forced a coin on my watch list to ultimately rise rather than fall. 

Figure 2: Our coin vs. Tether (USDT). Click here to see full-sized image.

 

Now, I won’t reveal the name of this coin. That’s because I recently recommended it to my New Crypto Wonders Members. But it can still serve as an example to you. 

The lesson: Look beyond near-term price action to discover the opportunities and pitfalls of reactive trading.

Prior to the crash, this coin was trading at $14.26. The crash dropped its price down to $12.76 as BTC also retreated. But four hours later — when BTC had reclaimed only part of its intraday loss — this coin was trading higher than before the crash at $14.86. 

So how can this be? How can a Bitcoin flash wipeout actually make an altcoin go higher? Here’s how I believe things played out on a deeper level:

  1. First, the Ledger hack was announced and BTC reacted by dumping immediately.
     
  2. Altcoins (like our example) followed BTC down.
     
  3. Then, shorts started to pile in. Investors who only considered near-term price action and not fundamentals (an error my colleague Jurica Dujmovic commented on recently) saw the correction and believed everything would continue collapsing, so they bet on that.
     
  4. Here’s the key information they missed: Technical hacks usually recover in one of two ways:
    1. They recover almost immediately in a bull market.
       
    2. They take a few days to recover in a bear market.

    Remember, we said that the shift from bear to bull is already underway. Most should have expected a resolution rather quickly.

  1. And indeed, it did. Within just a few hours, Ledger had released a patch so dApps could remove the corrupted code. Then, the spot prices of both BTC and our altcoin rebounded almost immediately, demonstrating bullishness in the market.
     
  2. Now the shorts that piled in have to cover their losses. So, they have to buyback their asset on the spot immediately. This is known as a short squeeze.
     
  3. Short squeezes typically make the price go higher momentarily. And indeed, it did in the case of this coin.

I should note that this coin has shown remarkable resilience in previous BTC wipeouts. That may have contributed to its ability to outperform in this recovery. 

That said, these conditions aren’t necessarily unique to this coin … which brings me back to today’s lesson. Arming yourself with an understanding of the fundamentals and tokenomics of any asset you plan on or are already invested in is vital in navigating the wild slings of crypto.

Having that knowledge means in times of volatility, you’ll be more able to differentiate between a near-term squeeze and a real correction. It also means you’ll significantly improve your chances of avoiding an emotional or fearful response. 

After all, seldom does fear lead to good decision-making. 

And if you’re interested in learning more about my mystery coin, I encourage you to check out our New Crypto Wonders page

Best,

Dr. Bruce

About the Contributor

Dr. Bruce Ng is a literal rocket scientist who was among the first to write about DeFi. Today he applies the same mathematics and scientific methods to the crypto space to discover the world’s most promising, and potentially most profitable, altcoins.

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