The Nazi Blood Flag was originally the flag of the 5th Munich Stormtroopers Company. It was being carried as one of many Nazi flags on parade through the streets after the abortive Beer Hall Putsch. 16 Nazis died in the confrontation with the police that followed, and this particular flag was captured. The flag was recovered by the Nazis from the police in 1925, and it became a symbol of Nazi martyrdom. It was remounted on a special black flag pole with a wreath top.
A ritual developed whereby new Nazi flags weren't "consecrated" until Hitler touched the Blood Flag to them.
The Blood Flag was reported destroyed after the U.S. Air Force destroyed most of Munich. However, there is no real evidence to support this claim and its ultimate destiny is unknown.