What Is Flash Crash?
A flash crash is an extremely rapid and severe price decline — often 20-50% or more — that occurs within minutes and frequently reverses almost as quickly. In crypto, flash crashes are typically caused by cascading liquidations (a deleveraging spiral), fat-finger trades (accidentally selling a massive amount), thin order book liquidity, or algorithmic trading errors.
How Flash Crash Works
Flash crashes exploit thin liquidity: a large market sell order cascades through the order book, triggering stop-losses and liquidations, which generate more sell orders, which trigger more liquidations. The entire feedback loop can drain an order book in seconds. Notable crypto flash crashes include Ethereum's 2017 GDAX crash from $319 to $0.10, and multiple Bitcoin drops of 15-20% in minutes.
Why It Matters for Traders
Flash crashes are both a risk and an opportunity. The risk: stop-losses execute at terrible prices, and leveraged positions get liquidated at the worst possible moment. The opportunity: limit buy orders at extreme discounts can fill during the crash and immediately return to profit as the price recovers. Keeping "stink bids" — limit buy orders at extreme discount levels — is a common strategy to capitalize on flash crashes.
