Bitcoin price explained: How a single trade crashed the cryptocurrency market

'Anyone who claims the bitcoin price is in any way organic, or follows real-world events, is simply talking nonsense,' one analyst claims

Even for something as notoriously volatile as bitcoin, the cryptocurrency's recent price fluctuations have been extraordinary.

Its value surged from $4,000 at the start of April to $8,000 by mid May, before yoyo-ing between $7,000 and $8,000 over the last few days.

Cryptocurrency experts have attempted to explain the rollercoaster market, citing a combination of recent good news in the crypto space and short term traders attempting to capitalise on uncertainty.

But a recent crash that wiped $1,000 off bitcoin's value in less than an hour can seemingly be explained by a single trade.

On the morning of Friday, 17 May, the sale of 5,000 bitcoin on the Bitstamp exchange – worth around $40 million at the time of the trade – resulted in a flash crash that wiped more than $10 billion bitcoin's market capitalisation in just 20 minutes.

Analysts say the huge impact of this trade illustrates the fundamental issues that still exist for the nascent commodity.

"The bitcoin price is a game for 'whales' – the largest traders – to wreck the smaller players," cryptocurrency author David Gerard wrote in a blogpost analysing the market dip.

"This was a huge dump... This keeps happening, and has done for the past few years – a pile of short or long positions on the price will be blown by someone manipulating the price.

Mr Gerard claims the cryptocurrency market is "rife with insider trading" and that a number of so-called whales "have colluded for years".

The borderless and semi-anonymous nature of bitcoin means it is difficult to police such instances of market manipulation, while the lack of regulation compared to other commodity markets mean a handful of bad actors are able to exploit it for financial gain.

Bitcoin has fluctuated wildly in price over the last week, shooting up above $8,000 before crashing back below $7,000 (CoinMarketCap)

The Bitstamp exchange launched an investigation into the trade within hours of the crash taking place, though few details were given.

"Our system behaved as designed, processing and fulfilling the client's order as it was received," the exchange tweeted.

"We closely examine every event that causes large-scale movement in our order book and have started an immediate case investigation."

Other cryptocurrency experts claim such market fluctuations should not detract from the underlying value of bitcoin as both an investment asset and a currency.

Ana Bencic, foudner of cryptocurrency firm NextHash, believes the price of bitcoin will continue to rise in the long-term, despite the recent crash.

"Bitcoin has been enjoying firmly positive market sentiment recently, so I am sure that the price will soon recover," she told The Independent.

"The ease of use, transparency and potential for rapid returns make cryptocurrency investment very attractive."

The price of bitcoin has been unusually volatile in recent weeks (Getty Images/iStockphoto)

But according to Mr Gerard, it is only a matter of time before similar market manipulation takes place again.

"The market's structure is terrible, trading on the exchanges is thin, and all the incentives are still there," he wrote.

"Anyone who claims the bitcoin price is in any way organic, or follows real-world events, is simply talking nonsense. We've seen how it works, live in action, in front of us."