The BTC/USD1 trading pair on Binance recently experienced a dramatic flash crash, where Bitcoin prices briefly plummeted to $24,000 before rebounding almost immediately. This incident, lasting merely a few seconds, raised concerns about liquidity risks associated with newly launched trading pairs, despite Bitcoin prices on major pairs like BTC/USDT remaining unaffected.
The fluctuation in the BTC/USD1 pair highlighted vulnerabilities linked to its recent introduction. USD1, a new stablecoin issued by World Liberty Financial and backed by the family of former President Donald Trump, fluctuated significantly. Following the crash, the BTC/USD1 price stabilized above $87,000, with charts illustrating a steep wick but no liquidation damage reported.
The timing of the incident coincided with the Christmas holiday, a period known for decreased trading volumes. Some market observers speculated that the price movement could have served as a liquidity test for the BTC/USD1 trading pair. Joao Wedson, founder of Alphractal, indicated that such phenomena often surface in bear markets, where capital inflows tend to diminish, causing sharp volatility across low-liquidity trading pairs. “This type of price dislocation and arbitrage opportunity arises more frequently than one might expect in bearish phases,” he explained.
Further context was provided by the investor community, which linked the volatility to Binance’s promotional efforts for USD1. The exchange had recently launched a campaign offering a 20% APY for deposits of up to $50,000 in USD1 per user. Reports from WuBlockchain indicated that this promotion triggered a surge in USD1’s supply, increasing by over 45.6 million tokens within hours, consequently leading to a total market capitalization above $2.79 billion. As capital flowed into USD1, its price increased by 0.2%.
Market participants engaged in arbitrage by borrowing USD1 to sell on the spot market, attempting to capitalize on the promotion. However, some traders opted to sell through the BTC/USD1 pair, caught off guard by its thin liquidity, resulting in the abrupt price collapse. One investor, known as Punk, downplayed the incident as a minor fluctuation typical of a bear market, suggesting that similar occurrences could be expected in the future.
As discussions regarding market liquidity continue, a critical question arises: Could such an event occur within the BTC/USDT trading pair? This pair, recognized for its high liquidity, could face substantial liquidation losses if a sudden drop were to transpire. Analyst Maartunn referred to Kaiko data, noting a significant increase in Bitcoin’s 1% market depth in recent years, which now exceeds $600 million—above pre-2022 crash levels.
Despite the BTC/USDT pair experiencing a price decline of 21.77% over a span of more than 100 days, reaching a low of $86,089, the average daily spot volume remained robust at $19.8 billion, totaling $613.5 billion. This improved market depth and high trading volume suggests that a similar event on BTC/USDT is unlikely.
Nevertheless, the recent flash crash serves as a valuable lesson for traders. Careful selection of trading pairs is crucial, as low-liquidity pairs pose significant risks, including severe slippage and unexpected losses. As the market evolves, participants should remain vigilant to safeguard against potential vulnerabilities in trading strategies.
