Attention spans get shorter and shorter it seems. The 24 hour news cycle seems to have gotten whittled down to a 24 minute news cycle. Once in a while though, a story has a great deal of impact and is referred to as an example of ‘something’ over the long term. This goes back in my memory to at least Watergate. Think about it. The scandal that enveloped the Nixon administration and led to his resignation is known by the name of a hotel in Washington D.C. at the time. The Watergate Break-In is now just “Watergate” and refers to more than just a break-in. There’s a plethora of ‘gates’ after that one, even deflate-gate when the entire football world was in a tizzy over a couple of psi of air in a ball.
Now in the markets we’ve had ‘crashes’ since 1929. And more recently, we’ve had “Flash Crash” added to the lexicon. It was just used again in the Ethereum market, so I guess now flash crash is up there with anything “-gate.” And as soon as it happened the cry was this is the end of the Ethereum market and all the other crypto-currencies with it. See what a bubble it was? Etc, etc…
Ethereum is working its way back up. And any flash crash is immediately followed by a bounce as violent as the drop. I guess that’s part of the definition, though since it’s a new phrase still finding its footing, that part may still be up for interpretation. The fact that we are applying a newly accepted term like flash crash implies, to me at least, that the market in question is not “over.” When there was a crash in 1929, I don’t think that people were immediately terming it that. “End of the stock market” is probably closer to what was thought at the time. The term crash would have been a more hind sighted expression. After the dust settled. No doubt before the market recovered, but probably not a coined phrase the next day either.
When it happened in 1987, “crash” was the term used to compare the two events. And when the “flash crash” happened in Ethereum last week, the expression was used to compare it to the flash crash in equities in 2010. Hind sight. We’ve seen this before. All of those equity indices are still around. Thriving, even. It wasn’t the end of the stock market back then, it’s not the end of Ethereum now. These markets find a bid. Buyers emerge. That means that the markets in question will continue as there are still people that think there is value to be had.
This move in Ethereum (and in turn other crypto-currencies) was actually a pleasant “coincidence” of timing in my mind. Now the move itself was attributed to a “multi-million dollar” sell order hitting the market all at once. A “fat finger” order was one of the suspected causes, i.e. someone putting in an order larger than they intended. Like with an extra 0 on the end of an order…Selling 10,000 instead of 1,000 is a prime example. Maybe that is what happened. Fat finger is another term that was invented for errors or occurrences in our standard, regulated markets…and the fact that we recognize the expression means it was not a one-time only event.
The pleasant coincidence is that the market needed a catalyst for a large correction. Not that large, but the fact that it has not fully regained the lost ground means it definitely had a real impact. Whew! Needed that. The last couple of week’s financial news has had an amazing number of mentions and articles about the run-up in Bitcoin and Ethereum. Everyone wants to get in on this get rich quick trade. No downside. Like buying NASDAQ stocks in 1999. And people call them bubbles along the way. But the money chasing easy money pours in anyway. And then much of it vanishes. People gambling and losing money because they never thought they’d lose the money.
So the “weak longs,” as they’re often known, get into the market and quickly chased out. They are not buying Bitcoin or Ethereum with any long term opinion. In fact, many don’t even know what they are buying. But if other people were making quick money, they wanted in. And got what they deserved. Cruel? Don’t kick someone when they’re down? Well, none of this is easy. It’s not supposed to be. Buying a parabolic move in anything generally skews the risk to a level not worth trading. And if you do buy one of those moves, it should always be with an understanding that reversals happen quickly and violently in such markets, so buy for the long term or not at all…and be prepared for some pain.
The point I’m making is that crypto-currency markets are much like other markets. Young ones are very thinly traded, people get rich or go broke in short periods, and the moves they make are the same ones made by traditional instruments when they were newer to market. The idea of regulated markets would do much to change the trading of these instruments. I believe it would quell a fair amount of the volatility they experience, like an old pink sheet stock becoming listed on an exchange. In the end they will trade as instruments across all asset classes find a way to trade from time to time. Unpredictably. Charts or fundamentals, unpredictability is what happens at some point and drives prices in ways we can’t believe have ever happened before. Until we remember that there was even a name invented for it one of those times it did.
2 thoughts on “What’s That Crashing Noise?”
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Thanks for the great article. I will be cautious!