The white hot cryptocurrency Ethereum went on a wild ride on Wednesday, plummeting from around $320 to around 10 cents in a so-called “flash crash.” The price soon recovered but not before some investors took a terrible bath and some others made out like bandits.
Here’s what happened.
Ethereum, a popular new digital currency, trades on exchanges much like its older rival bitcoin. The most widely-used exchange, Coinbase-owned GDAX, operates like a traditional stock exchange, and lets traders buy stock on margin and place so-called “stop loss” orders—an automated instruction to sell if the price falls below a certain point.
As Adam White, the VP of GDAX, explained in a blog post, one investor placed a multi-million dollar Ethereum “sell” order at 12:30 p.m. on Wednesday. The size of the order caused the price of the currency, which is already volatile, to dip.
Things started to go really haywire, however, as the price dip triggered a series of stop loss orders.
“This slippage started a cascade of approximately 800 stop loss orders and margin funding liquidations, causing ETH to temporarily trade as low as $0.10,” White explained.
In other words, the computers executing the stop loss orders began to sell at all costs and, so long as there was someone on the other side to match the order, the trade went through—even if the price was totally irrational, and driven only by an algorithmic frenzy.
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This is hardly the first time such a thing has happened, of course. The infamous “flash crash” of 2010 saw automated trading tied to ETFs drive stocks off a cliff, including those listed on indexes like the Dow Jones and the Nasdaq, before the share price recovered a few hours later.
The big difference with Wednesday’s Ethereum flash crash is that, unlike the events of 2010, GDX says it will not unwind the trades.
#GDAX (#Coinbase) will not reverse margin & limit trades that were caused by a 99% drop in #Etherium/#ETH yesterday https://t.co/EQuJaSWwR1pic.twitter.com/DOGTnCnX2Q
— Alex Melen (@amelen) June 22, 2017
This is terrible news for those who sold Ethereum while the price was falling through the floor. It would be like seeing a computer sell of your Apple shares for $1 and not being able to do anything about it. Meanwhile, those who had put out “buy” orders to buy Ethereum if the price fell super-low would have made a killing.
Some seasoned traders on discussion forums like Hacker News basically shrugged at the news, and said such events are not uncommon in foreign exchange trading, and that those who placed the stop-loss orders should have known better. Others noted this just how markets work, and praised GDAX for how they handled it:
A trade is a trade… Large sell fills the bids, triggers the S/L orders and then some!
All is in 'order' folks.https://t.co/4iYfV7JV5D
— Nigel Quantick (@nigelquantick) June 22, 2017
https://twitter.com/rogomonz/status/877832548583219200
Others, however, are grumbling and calling for a class action suit against Coinbase. Meanwhile, some speculated that the Ethereum flash-crash came about because of an error or that a “whale” trader deliberately induced it in order to make money off the chaos:
Either the fat finger of the year or market manipulation. Also a cautionary tale on stop orders. https://t.co/IioYCoJ6GB
— The Philadelphia Group (@ThePhillyGroup) June 22, 2017
Wednesday’s events are just the latest piece of news in a wild few months for Ethereum, and for cryptocurrency in general, as speculator interest in digital and blockchain-based assets is at an all-time high. As of Thursday morning, the price of one unit of Ethereum was $330, according to CoinDesk.
