There was a flash crash in the cryptocurrency market at around 7:30 ET Wednesday morning that sent most major cryptocurrencies lower in a matter of minutes. While Bitcoin (BTC 3.53%), Ethereum (ETH 4.92%), and Dogecoin (DOGE 4.19%) all plunged, they recovered quickly.
As of 11:15 a.m. ET, Bitcoin was down just 1% in the last 24 hours at $48,036 but hit a low of $46,648 early this morning. Ethereum is down 1.7% in the last 24 hours at $3,806 but hit a low of $3,716. The second-largest cryptocurrency is down from $4,123 as recently as midday Monday.
Dogecoin has had the rockiest day, trading around $0.1775 until about 5:00 a.m. and then dropping to $0.1695, a 4.5% drop, in around 2 hours. Values have recovered slightly, but Dogecoin is still down 1.6% over the last day.
What's going on with all of these wild moves, including yesterday's fire sale?
This week will be a bit of a strange trading week as many traders take time off and institutions prepare their portfolios for year end. That may mean selling assets that have done well, like cryptocurrencies, to take profits and reallocate them to other assets.
We also have a large options expiration coming on Friday with 129,800 options contracts worth over $6 billion set to expire, according to Skew and reported by CoinDesk. These options can cause massive trading volume near expiration as investors try to hedge losses and reduce exposure near expiration. This can happen in the stock market as well, but options are an increasingly widely used instrument in cryptocurrencies as funds buy more assets and future trading grows in availability.
The final wrench was Elon Musk's podcast interview with Lex Fridman, which was released yesterday. Musk said he didn't "get" Ethereum, talked about a cryptocurrency like Dogecoin being used on Mars, and discussed Bitcoin's mysterious founder. He also seemed to downplay the potential of Bitcoin because of its high transaction costs. Musk can move markets with a single tweet, and this wide-ranging interview was seen generally by those in the crypto community as a negative take, particularly on Bitcoin and Ethereum.
Investors in cryptocurrency should be used to volatility by now, but this week has been extreme. Chalk up some of that volatility to the holiday week, but some could be attributed to huge options expirations at the end of the year. And this is driving extremely high volume across the crypto market.
Since there isn't any real fundamental news, I wouldn't be too worried about this week's moves. The fundamental growth story for crypto utility continues to improve, and that's ultimately what will drive the industry's value. In other words, there's no reason to change your investment thesis, despite the volatility today.