What Is the Impact of a ‘Flash Crash’ on the Bid-Ask Spread of a Cryptocurrency?

A 'flash crash' in a cryptocurrency market has a dramatic and immediate impact on the bid-ask spread. As prices plummet rapidly, market makers and other liquidity providers will pull their orders from the market to avoid taking on excessive risk.

This sudden withdrawal of liquidity causes the bid-ask spread to widen dramatically. In some cases, the spread can become so wide that it effectively halts trading.

The lack of liquidity exacerbates the price decline, as there are few buyers to absorb the selling pressure. It can take a significant amount of time for confidence to return to the market and for the bid-ask spread to narrow to its normal levels.