Ethereum Flash Crash & The Problem With Crypto Currencies

June 25, 2017

The Ethereum flash crash, June 2017

Ethereum, the world’s second-largest crypto currency, suffered a “Flash Crash” of epic proportions on Wednesday. After leading the rise in crypto and putting in massive gains this year, Ethereum flash crashed from $317 to as low as 10c, wiping out stops on the way down, before reversing back to it’s original price.

Crypto Currencies have seen hyperbolic moves this year. The massive increase awareness, mainstream media attention and price fluctuations has seen traders flock to the market looking for quick gains. Make no mistake, this is the wild west of trading, where fortunes can be made and lost in a day. It is not for the faint of heart or the inexperienced, especially when traded on leverage.

What is a flash crash?

A flash crash is when a market suffers a massive, deep, and rapid loss, before quickly rebounding back to its initial price. While individual stocks and instruments suffer flash crashes on occasion, the S&P500 Flash Crash of 2010 was one of the first times it garnered main-stream attention.

A flash crash is an unfortunate side-effect of the way markets are structured. Steps have been taken to prevent such things from happening in developed (and even emerging) markets, however due to liquidity issue and the electronic nature of markets, they happen from time to time and are difficult to avoid.

Why did Ethereum Flash Crash?

According to GDAX VP Adam White, a “multi-million dollar market sell” order was placed on their exchange, which essentially took the available liquidity in one swoop. This triggered stops and margin-funding liquidations. Basically, there wasn’t enough liquidity on the book to absorb that kind of market sell order, and it crashed the market.

What does this tell us about Crypto Markets?

A flash crash like this shows us that Crypto markets are undeveloped. The reason given by GDAX shows that a single order can wipe the entire order book, and crash the market to zero. Yes, this can and does happen on other markets, but not to this extent and not without some sort of reason. Crypto is definitely exciting, but trade it with caution and be prepared for the unexpected.

Oh, and just to note…it doesn’t look like the GDAX exchange will be reversing any of the trades caught during the flash crash.