Amid Bitcoin’s flash crash on Tuesday, a number of leading crypto exchanges buckled under pressure, preventing retail investors from buying the dip.
The price of several top cryptocurrencies fell sharply on Tuesday, with Bitcoin losing over 9%. The value of the flagship crypto plummeted from $52,000 to $43,285. And as of press time, Bitcoin had recovered to the $46,000 region.
Ethereum also plunged from $3,700 to nearly $3,000, losing about 18% of its value.
In the heat of Bitcoin’s hefty slip, there was a surge of traffic to exchanges as investors thronged to either liquidate their positions or buy the dip. Coinbase, for instance, told its customers that it was "experiencing degraded performance across [its] transaction services" and that "funds may be delayed and transactions may be canceled at elevated rates." It added that a "sudden increase in network traffic and market activity led to a degradation in our services."
The issue was resolved later in the day, with the exchange stating that "transactions are going through normally and service issues have been resolved. We’ve taken steps on our end to maintain stability and keep our services up."
Similarly, Kraken also buckled under the pressure. The exchange postedan update on its status page saying that it was experiencing some difficulties in web and mobile connectivity, as well as email delivery. As of 17:07 UTC, Kraken noted that “some clients are still experiencing issues with ACH online banking purchases.”
Meanwhile, Gemini also temporarily entered full maintenance mode "to address an exchange issue that is causing platform performance issues."
Many crypto traders have been angered by these operational difficulties, especially in periods of high volatility. Some have accused the exchanges of market manipulation. However, one of the most likely causes of the flash selloff was over-leveraged positions by margin traders.
Customers are often allowed to open massive margin positions on most crypto exchanges. Huobi and Bybit, for instance, allow customers to have up to 100x margin. What this means is that customers can access a trading value of up to $100 by investing $1.
The margin rates on crypto exchanges are significantly higher than those found on traditional brokerages and they can fuel volatility in any direction.