Crypto Flash Crash: A Reminder of Ongoing Volatility

Recently, we wrote about the role of cryptocurrencies: strategic reserve, future infrastructure, or still too volatile an asset? And their role in an investment portfolio.

We specifically noted that, despite many advances, cryptocurrencies and all related assets remain highly volatile overall (excluding Stablecoins).

During the second week of October 2025, the cryptocurrency market experienced one of the most violent drops in recent years. Bitcoin and Ether, the sector’s two major references, fell sharply in a matter of hours, in a movement now known as the October (2025) crypto flash crash.

*Remember that the term “flash crash” originated in traditional stock markets, not crypto.

It is used to describe an extremely sharp, short-lived drop—typically minutes or hours—caused by a combination of automatic mass selling, lack of liquidity, and feedback between algorithms.

• On May 6, 2010, the Dow Jones fell almost 9% in minutes, wiping out over one trillion dollars in market value before nearly fully rebounding shortly afterward.
  
• The main cause was an imbalance between algorithmic sell orders and a lack of counterparties in the order books, causing a temporary price collapse in S&P 500 stocks and futures.

Since then, “flash crash” has been used as a generic label for similar episodes—sudden, technical drops amplified by automated systems or low liquidity—both in stock markets and crypto.

In the top chart, it is clear: after a few relatively stable days, both cryptocurrencies plummeted sharply on October 10. Ether amplified the movement, with a drop near 20%, versus Bitcoin’s 10%, showing much higher volatility. Although there was a subsequent rebound, the declines remain significant at the time of writing.

What caused the crypto flash crash

It all started with a sudden shift in sentiment following Donald Trump’s statements about new tariffs on China and geopolitical tensions.
Large investors reduced risk, and in the only 24/7 market, crypto (unlike stock markets), sell orders and automatic liquidations quickly cascaded. In other words, the crypto market was affected by being the only market open for risk reduction.

Crypto market capitalization fell from around $4.1 trillion to $3.3 trillion, meaning over $800 billion vanished within hours. At the time of writing, it is still 9% lower.

The result was also a wave of massive liquidations: according to several analyses, over $19 billion in leveraged positions were forcibly closed in less than 24 hours, a record figure. Lack of liquidity on some exchanges and high leverage acted like gasoline on the fire.

Lessons from this crypto flash crash

First, two lessons affecting risky assets in general:

1. Leverage is a double-edged sword. Many investors operate with minimal margins; when prices fall, platforms automatically liquidate positions, causing further declines.
2. Liquidity is fragile. In times of stress, buyers disappear, and the market can collapse with little resistance.

Then, three lessons more specific to crypto:

3. Cryptocurrencies are no longer isolated. The crash’s cause was not internal, but a global reaction to a political event. The crypto world increasingly behaves like another risky asset class within the financial system.
4. Bitcoin and Ether remain highly correlated. Although the chart shows slight differences, both assets move in unison, limiting real diversification within the crypto universe.
5. Even more significant drops in other cryptos: other cryptocurrencies experienced larger declines, showing their secondary role. For example, Solana (-12%) and XRP (-14%) hours later.

Another increasingly evident aspect is Trump’s ability to influence—or even manipulate, according to some—financial markets. A new weekend message coincided with a temporary rebound on 13/10. In this case, the flash crash was more than a blink: the drop lasted almost two days.

The increasingly connected crypto market

This is not the first time cryptocurrencies have experienced significant declines. As in previous episodes, the market partially stabilized, but the damage was done. Prices remain below previous levels, and confidence will take time to recover.

For long-term investors, the message is clear: extreme movements in crypto are not exceptions, but part of their nature. Only a diversified plan and moderate risk exposure can turn these turbulences into anecdotes rather than financial disasters.

The October flash crash is not only a reminder of sector volatility but also of its growing connection with global macroeconomic and political factors.

We continue to believe that, for most investors, especially beginners, it is not essential to include cryptocurrencies in a portfolio.

However, we have allowed allocating a percentage of Bitcoin (or crypto) within our Advanced portfolios for clients/portfolios with over €/$100,000, more sophisticated, and with some financial capacity and risk appetite.

• Previously, we suggested a 3% allocation as a reasonable guide;
• today, in the new context, we consider this range can be more flexible, reaching up to 5%.

Some investors advocate higher crypto and blockchain exposure as a faster way to achieve financial goals, especially to accumulate more capital for a longer life. This is certainly worth considering, but everyone must assess it according to their goals and risk profile. It requires accepting high volatility and having a strong risk appetite.

This crypto flash crash is a good reminder of that.

At inbestMe, we continue to believe that the best protection against such events is not predicting when they will occur, but having a robust, diversified strategy adapted to each investor’s risk profile.