Flash crash results in losses on Bitfinex

On November 29^th, around 6:30 PM, a ‘flash crash’ hit the cryptocurrencies NEO, OMG, and ETP. The crash lasted a brief 15 minutes, with the tokens losing and regained 90% of their value within the 15 minutes time frame.

This is a representation of how unregulated and dangerous the crypto trading market can be. Among all the exchanges, Bitfinex seemed to have been hit the hardest, as customers complain of bad service and a lagging website during the ‘flash crash.’ Numerous investors are claiming that they have lost thousands of dollars due to the bad performance of the Bitfinex website. Some have also claimed that they are now in debt to Bitfinex.

How can trading result in debt? This can be explained by understanding the term 'margin trading'. In margin trading, traders borrow money from brokers, in this case Bitfinex, and this increases their buying power. However, such a move also puts an unprecedented amount of risk on their investment. In case of a flush out, the investors not only lose their original investment but also must pay the cumulative amount of money that was borrowed from the broker due to the margin trading.

A South African customer of Bitfinex claims that the flash crash has left him $38,000 in debt to Bitfinex. Disheartened investors have started calling Bitfinex a cheater as they claim that their application stopped working during the crash and orders were not closed as they were initially programmed.

Rumors of abuse are popping out as investors believe that the flash crash may have been triggered by Bitfinex themselves to earn easy money. Traders are also pointing out that the ‘stop loss,’ which they had set to stop such kind of losses, were not triggered at the amount set.

Stop loss triggers are basically mechanisms in place for protecting the investors from such flash crashes. The failure to trigger stop losses could have adverse effects, as is evident with this incident.

In response to investors' claims that the platform stopped working and reimbursement is due, Bitfinex claimed that if they start reimbursing customers because of crashes then soon customers will start claiming refunds from every realized loss. They further clarified that this is just not feasible for them.

This incident highlights an important point of cryptocurrencies, which is that they are highly unregulated and insecure; even the slightest rumors can trigger their crash. As they are not officially recognized by investment protection agencies, protection against such crashes lies on the exchanges.

For the latest on Bitfinex, see our Bitfinex exchange review.