In a recent disclosure, a former employee of Alameda Research, a trading firm led by Sam Bankman-Fried, has unveiled crucial information regarding the dramatic 87% plummet in Bitcoin (BTC) value during 2021.
The incident, which occurred on October 21, 2021, witnessed BTC’s price on Binance.US nosedive from approximately $65,760 to $8,200 within a short period.
Insider Details Of Bitcoin Plunge And Alleged Manual Trading Error
The ex-employee, Baradwaj, alleged that the trading firm was directly responsible for the sudden price drop, attributing it to a “manual trading error” rather than solely relying on algorithmic trading.
Baradwaj claimed that a trader at Alameda Research inadvertently entered an incorrect decimal while attempting to sell a block of Bitcoin in response to breaking news.
Consequently, the trade was executed at an extraordinarily low price, resulting in a drastic crash.
Highlighting Alameda’s trading operations, Baradwaj revealed that the firm primarily employed semi-systematic strategies, where traders fine-tuned algorithms to execute trades automatically at high frequencies.
However, manual trades were occasionally employed in instances of system bugs or arbitrage opportunities on platforms where automated trading had not been implemented.
Unlike automated trading, which adhered to sanity checks and market prices, manual trades were discretionary and prone to human error. Unfortunately, an Alameda trader’s mistake triggered a chain reaction on that fateful day in October.
The erroneous trade caused Bitcoin’s price to plummet from its peak of $65,000 to as low as $8,000 on certain platforms before swiftly recovering through the actions of arbitrageurs.
The incident created a stir on social media, with traders and news outlets scrambling to understand the sudden price movement. Binance.US, the platform at the center of the flash crash, issued a statement attributing the event to a bug in the trading algorithm of one of their institutional traders.
Baradwaj further states that the losses incurred by Alameda Research were substantial, amounting to tens of millions. Still, due to the genuine nature of the mistake, the firm took immediate action to enhance sanity checks for manual trades.
This incident exposed a vulnerability in Alameda’s risk management practices, prompting implementing “robust measures” to prevent similar occurrences in the future.
The former employee shed light on the working culture at Alameda, characterized by a philosophy of moving fast to capitalize on opportunities, even if it occasionally resulted in unforeseen costs or vulnerabilities.
This approach, championed by Sam Bankman-Fried, shaped the culture at Alameda Research and the now-bankrupt crypto exchange FTX.
For nearly two years, the Bitcoin flash crash incident remained a puzzle to the public, leaving many wondering about the cause behind such a significant price drop. With the revelations made by Baradwaj, the veil has been lifted, providing valuable insights into the events that unfolded behind the scenes.
As of this writing, the largest cryptocurrency in the market, Bitcoin, trades at $26,600, down by over 2.1% in the 24-hour time frame.
Featured image from iStock, chart from TradingView.com