Bitcoin’s Price Falls 12%, to Lowest Value Since May

It was almost certainly caused by microstructure of the Bitcoin market: at least two exchanges allowed people to buy Bitcoins on margin, and published widely distributed statistics of how much aggregate margin was outstanding on a day to day basis. It did not take much Excel modeling to figure out the approximate price points for Bitcoin where the exchanges' published margin requirements would trigger cascading margin calls. [+]

If you can predict a cascading margin call in advance, that's tradeable. There is a fairly straightforward way to predict the timing of one.

[+] I'm using a bunch of words here which may not be common hacker jargon, though they're table stakes for trading. Margin is a loan securitized by assets kept with your broker (exchanges, in the Bitcoin world, since they don't separate functions) which allows you to employ "leverage", magnifying the gains if you trade well and the losses if you trade poorly. Margin makes it possible to lose more value than you started out with, something which is not possible when buying instruments like stock or Bitcoins outright. To avoid the problem of traders leaving the broker with the risk in the event of their position getting moved against, brokers do "margin calls", obligating customers to either a) post more collateral or b) liquidate positions involuntarily if their position is moved against in such a way that the equity threatens to go negative. If you're using margin to buy Bitcoins, a margin call forcing liquidation causes you to sell Bitcoins. This will tend to decrease the price of Bitcoins in the next few seconds. Decreasing prices cause other people to hit margin calls. This causes a "margin cascade" feedback loop as the market rapidly de-levers and a lot of over-margined traders lose their shirts.

For an example of someone who correctly predicted this outcome in advance, see the Bitcoin Talk thread entitled "The Bitfinex Credit Bubble Cannot End Well."

https://bitcointalk.org/index.php?topic=667105.0

Another example of people correctly picking the outcome in advance would be the surge in BTC swaps (i.e. margin used by people shorting Bitcoin, expressing strong confidence that it will fall in price in the short term) in the 48 hours prior to the flash crashes. (I'm not necessarily saying that those folks intentionally precipitated the margin cascade.)

So.. going with camp 1 then, eh?

Awesome, my bot got me some while they were cheep :)

Not massively useful, but interested me enough to look it up: $6.3B is more than the market cap of 40 companies in the FTSE 100

Currency exchange rates aren't supposed to need a logarithmic scale. That would be a visual equivalent of burying the lede.