Crypto Market Flash Crash: Analyzing the Causes

Shaw, Golden Finance. Around 1:00 PM Beijing time today, the cryptocurrency market experienced sudden and significant volatility, experiencing a rapid decline. Bitcoin briefly dropped by over 2%, briefly falling below $111,300; Ethereum fell by 5%, briefly falling below $4,100. Other cryptocurrencies were also affected, with Solana dropping 7% within three minutes and Dogecoin dropping nearly 11%. Data shows that within an hour, the total amount of liquidated positions across the entire network reached $1.026 billion, of which approximately $1.007 billion was liquidated from long positions and approximately $19.3699 million was liquidated from short positions. Furthermore, according to Coingecko data, the total cryptocurrency market capitalization fell below $4 trillion, currently at $3.992 trillion, a 24-hour decline of 4.0%. BTC holds a 56.4% market share, while ETH accounts for 12.5%. Institutional analysis of cryptocurrency trends indicates that Bitcoin faced heavy selling pressure starting at 1:59 PM. Although Bitcoin briefly dipped to 111,300, it subsequently rebounded as bargain-hunting buyers re-entered the market. Let's briefly analyze the triggers of this unexpected market flash crash. 1. Rumors of "Bybit user asset theft" may have triggered panic. Today, a shocking social media report surfaced: Ticker Wire reported that the cryptocurrency exchange Bybit had been hacked, with $1.5 billion in ETH stolen. The hackers then massively transferred and sold the stolen crypto assets to increase market supply. This rumor triggered a sharp drop in the cryptocurrency market. Subsequently, Bybit issued an official statement addressing online rumors that "Bybit suffered a security breach and user assets were stolen," stating that these rumors were completely false, that user funds were safe, and that platform trading and operations were operating normally. Bybit's Chinese head, Tina, also issued a statement debunking the rumors, stating that the rumors originated from a false information posted on a social media account with only 59 followers. Community users were urged not to continue spreading this false information to avoid causing unnecessary panic. The authenticity of the Bybit rumors is no longer important; what matters is that they have caused market panic, and the panicked selling by investors has also stimulated short-term, significant market fluctuations. 2. Altcoins, represented by perpetual swap DEXs like Aster, have surged, but the market needs a cooling down. Decentralized perpetual swap exchanges (DEXs), represented by DEX derivatives platforms like Hyperliquid and Binance-backed Aster, have recently become a focus of market attention. Hyperliquid's market share has rapidly increased, reaching 6.9% in August, with a total trading volume of $21.4 billion, maintaining its leading growth rate. Within hours of its launch, Aster's native token, ASTER, saw its price soar 400% from its launch price. Aster has processed over $514 billion in trading volume for its two million users. After the token issuance, the platform's total value locked (TVL) briefly exceeded $2 billion, but has now fallen back to $655 million. According to CoinGecko data, Aster's price reached a high of $1.94 yesterday, with its fully diluted valuation (FDV) reaching $15.52 billion. As DEX platforms specializing in derivatives trading, both Hyperliquid and Aster support perpetual contract trading with high leverage. Hyperliquid's leverage is capped at 40x, while Aster offers up to 100x leverage for most trading pairs, with leverage reaching as high as 1001x for certain assets. Hyperliquid and Aster's unique profit-making features have also attracted a significant amount of liquidity. Last weekend, market sentiment for trading on Perp DEX intensified, fueling a surge in Perp DEX-related altcoins. MYX closed at $9.77, up 3.6% on the day before yesterday; RAGE closed at $0.2965, up 12.3% on the day before yesterday; DERI closed at $0.0063, up 9.4% on the day before yesterday; and AVNT closed at $2.03, up 0.1% on the day before yesterday. The popular Perp DEX trading methods, represented by Hyperliquiqui and Aster, have resulted in increasing returns for many investors, encouraging more investors to enter this sector and engage in leveraged contract trading. On the other hand, higher leverage ratios mean greater asset volatility and increase investors' risk of forced liquidation. 3. Arthur Hayes's sell-off of Hype tokens may exacerbate market panic. Last Sunday evening, BitMEX founder Arthur Hayes sold 96,628 HYPE tokens (worth $5.1 million) he had purchased a month earlier. In his speech at the WebX Summit on August 25th, he predicted a 126-fold increase in HYPE's value. Arthur Hayes today retweeted a research report from his family office, Maelstrom, explaining his selling of HYPE. Starting November 29th, 237.8 million HYPE tokens will be unlocked linearly over 24 months. At $50 per token, the team will unlock $11.9 billion, with nearly $500 million in nominal value flowing into the market each month. Current buybacks can only absorb approximately 17% of this amount, representing a monthly oversupply of $410 million. The impending massive unlocking of HYPE tokens could trigger selling pressure, which may be why Arthur Hayes chose to sell his Hype tokens at this time. 4. The Federal Reserve's interest rate cut has been implemented, but the expected positive impact may have worn off. Last Thursday, the Federal Reserve's latest FOMC decision lowered the benchmark interest rate by 25 basis points to a range of 4.00% to 4.25%, resuming the rate cuts that had been paused since December. Expectations of a Fed rate cut have long been building, and the market has long anticipated the positive impact on major assets like stocks and cryptocurrencies. The Nasdaq and many tech stocks have continued to hit new highs, and the cryptocurrency market is also at a cyclically high level. This week, Federal Reserve Chairman Powell is scheduled to deliver a speech on the economic outlook on Tuesday, having already dismissed market expectations of a rapid rate cut last week. Elsewhere in the market, U.S. Treasury prices fell slightly, with the 10-year Treasury yield rising 1 basis point to 4.14%. Spot gold broke through the record high reached on the day of the Fed's decision, rising to $3,708 per ounce, a daily gain of over 0.6%. After the rate cut was implemented, the market's pent-up fear of loss (FOMO) faded, instead increasing concerns about the uncertain outlook. The saying "when all good news comes out, bad news" is likely to resurface. 5. The DAT craze has cooled, and the driving force has weakened. Digital asset treasury companies (DATs), one of the catalysts of this bull market, may have peaked after attracting over $20 billion in funding, rapidly moving from a "blue ocean" to a highly inward-looking "red ocean." With the share prices of most DATs falling below their net asset value, liquidity pressures are emerging. According to data from The Block, many DATs are trading at or below their net asset value (NAV). Furthermore, liquidity is also a pressure point for DATs. A recent Coinbase research report clearly stated that the era of easy money and guaranteed net asset value (NAV) premiums is over. The significant premiums previously enjoyed by pioneers like MicroStrategy are eroding. Intensified competition, increased execution risk, and tightening regulatory restrictions are leading to a compression of NAV multiples. Some analysts point out that as the DAT market becomes saturated, investors are searching for the next hotspot, with renewed interest in areas such as DeFi, RWAs, and stablecoins. During the height of the DAT craze, Bitcoin and several other mainstream crypto assets were within the purchase range of corporate treasuries, which undoubtedly drove the rise of related cryptocurrencies. When the DAT craze gradually subsides, the driving effect of this model on the crypto market will also weaken.