On May 16, 2019, bitcoin experienced a momentary crash isolated to Bitstamp; the XBT/USD pair suddenly declined by nearly 20%. The crash extended longer than previous ‘flash crashes’ that have occurred across digital currency spot exchanges in the past.
Before 11 a.m. ET, bitcoin prices began to decline on Bitstamp and diverged from the broader market. As a constituent exchange of the TradeBlock XBX Index, during the initial price divergence, the index algorithm immediately detected the divergence and automatically de-weighted contributing prices in order to maintain a reliable reference rate for bitcoin. After prices normalized, nearly 20 minutes later, the XBX index gradually re-weighted Bitstamp to its corresponding weighting.
In the figure below we diagram the moment the price began to decline at Bitstamp and its corresponding influence on the XBX index, as it was de-weighted and eventually re-weighted.
Bitstamp Exchange is De-weighted from XBX Index during Sudden Crash
Data for chart sourced from the TradeBlock Professional Platform
The price decline began when a ~1,600 bitcoin market sell-order was placed, which filled a considerable number of existing bids in the order book. This pushed prices well below the broader market. 10-15 minutes after the initial decline, the divergence began to decelerate, as an increase in buying activity brought bitcoin spot prices on Bitstamp closer inline with the broader market. By 11:20 a.m. ET, the divergence was no longer discernible as bitcoin prices on Bitstamp traded in tandem with other exchanges.
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The importance of an institutional grade #bitcoin index: On May 16th prices declined ~19% on @Bitstamp. As designed, the XBX Index de-weighted Bitstamp to maintain a reliable reference rate. This is why XBX is relied upon by the leading firms for derivatives and AUM valuation. pic.twitter.com/n3ZdDRfH16
— TradeBlock (@TradeBlock) May 17, 2019
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