Bitcoin daily flash crash of 18% in the mid of El Salvador issues may be uncorrelated, says GlobalData

Following the news that El Salvador has officially accepted Bitcoin as a legal tender to join the US dollar as an official currency, and the cryptocurrency market has seen an overwhelming loss of $400bn in market value:

Sultan Ahmed, Analyst at GlobalData, a leading data and analytics company, offers his view:

“The ~18% flash crash and the currency’s acceptance by El Salvador are two uncorrelated events. Many have linked the drop in value to initial functional issues of Chivo (El Salvador’s Bitcoin wallet) during the early hours of beta testing, but we believe that the drop in Bitcoin was instead due to excessive leverage trading within the cryptocurrency market.

“Leverage trading involves borrowing capital, and, unfortunately, this can cause liquidations of large positions – something that is frequently observed within the cryptocurrency market due to its volatile nature.

“As of 7 September, liquidations have reached a local high of $3.22bn. To prevent this from happening in the future, GlobalData firmly believes that several cryptocurrency exchanges will need to reconsider the amount of leverage they offer, with some going as high as 100 times the capital put in by investors.

“Despite this drop, Bitcoin is still up by 56% over the past 50 days and has shown a partial recovery minimizing the drop to ~10% since yesterday. Pseudonymous Dutch analyst PlanB has previously stated that Bitcoin will exceed $100,000, as outlined in his Stock to Flow model, and there is great potential of this if it continues its current trajectory.”

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