During a 24 hour period on December 6th, the price of Bitcoin looked like this:
With a low price of $650 and a high of $1118, the swing was 75% down from the high of the day. All other alt coins were impacted in the same way. Litecoin was down about 50%, and PPC the same. How is this possible?
The first thing you have to realize is that Bitcoin is traded on many exchanges, and that each has their own traders. It takes time to move coin between exchanges, so you are better off just trading on one exchange. Because of this, each exchange has its own price for Bitcoin. If you check the Bitcoin ticker at the top of coinmonkey.com, you will see the range is usually about $100 from the high to the low. If there are no buyers at a given exchange, the price can swing wildly.
Because trading is spread out between exchanges, the volume at each exchange is lower than the collective daily Bitcoin volume. This means that if you trade on the smallest exchange, you could impact prices by making large trades. A ten percent increase in volume can lower the Bitcoin price by 25% if there are no buyers.
Finally, on December 6th, there was such an increase in volume, that some exchanges had a 30-60 minute trading lag. People would put in market sell orders only to see the trade executed much later at a much lower price than they hoped. This created even more selling with people believing it was the end of Bitcoin.
Prices have stabilized at about $700. So is this the beginning of a crash, or merely a flash? The key is buyers, and users. Bitcoin needs to have a continuous stream of new buyers, and people that use Bitcoin on a regular basis. If those two things do not happen, it could be the crash many have predicted.
Check back next year and we will let you know if it was a Crash, or a Flash.