Ethereum crashed from $319 to 10 cents in seconds on one exchange after ‘multimillion dollar’ trade
Arjun Kharpal | @ArjunKharpal
2 Hours AgoCNBC.comThe price of ethereum crashed as low as 10 cents from around $319 in about a second on the GDAX cryptocurrency exchange on Wednesday, which is being blamed on a "multimillion dollar market sell" order. Ethereum is an alternative digital currency to bitcoin and had been trading as high as $352 on Wednesday.
Adam White, the vice president of GDAX which is run by U.S. firm Coinbase, posted on the exchange's blog, outlining what took place at around 12:30 p.m. PT on Wednesday. According to White, the multimillion dollar market sell order resulted in a number of orders being filled from $317.81 to $224.48. As the price continued to fall, another 800 stop loss orders and margin funding liquidations caused ethereum to trade as low as 10 cents. A stop loss order is a trade that is executed automatically once a security – in this case ethereum – hits a particular price. Margin funding is essentially trading with borrowed funds. Liquidation is when these positions are closed automatically in order to prevent further losses. The knock-on selling effect caused the flash crash on GDAX.
The chart below is a screenshot of the GDAX price showing the high and low price.
Many on social media criticized GDAX and alleged there was some sort of illegal activity taking place. GDAX denied this. "Our initial investigations show no indication of wrongdoing or account takeovers. We understand this event can be frustrating for our customers. Our matching engine operated as intended throughout this event and trading with advanced features like margin always carries inherent risk," White said in a blog post.
"We are continuing to conduct a thorough investigation and will keep customers updated with any resulting actions."White also noted that these trades are final and will not be reversed. The exchange temporarily halted trading of ethereum on Wednesday before restoring the system shortly after.
Ethereum was trading at around $317 on the GDAX exchange in the early hours of Thursday morning. According to industry and price tracking website Coinmarketcap, which takes into account the price on several exchanges, ethereum was trading around $336. As well as the issues on GDAX, investor demand at the funding launch for an ethereum-based messaging app called Status clogged the ethereum network, an industry insider told CNBC.
User makes $1 million off $380?Ethereum traders were outraged by the crash blaming GDAX for not having proper controls, and even accusing whoever put the sell order in of market manipulation.
And it was a painful experience for many. On the social forum Reddit, users complained of losing large sums of money from $3,000 to $9,000. But it also seemed to be a large money making event for some too. On the trading forum StockTwits, user John DeMasie posted a screenshot of trade history around the time of the flash crash. It showed one person had an order in for just over 3,800 ethereum if the price fell to 10 cents on the GDAX exchange. Theoretically this person would have spent $380 to buy these coins, and when the price shot up above $300 again, the trader would be sitting on over $1 million. CNBC has been unable to verify the screenshot posted by DeMasie.
Cryptocurrency excitementThe ethereum crash comes amid rising interest in the broader cryptocurrency space. Both bitcoin and ethereum have hit record highs recently, and have both seen pullbacks.
Ethereum in particular has been talked up because of the blockchain technology that underpins it. Whereas bitcoin and its blockchain is seen as a payment network, ethereum has been designed to support so-called smart contract applications. A smart contract is a computer program that can automatically execute the terms of a contract when certain conditions are met.
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The ethereum blockchain has also got backing from a number of large firms such as Microsoft, which has helped to drive the price higher. Ethereum is up around 4,100 percent year-to-date, based on the price it was trading at on Thursday morning, according to Coinmarketcap.
Arjun KharpalTechnology Correspondent
My two cents:
A week or two ago I was contacted by someone interested in Forex training and they brought Ethereum to my attention. We both looked at the Ethereum chart. I had never traded Ethereum, Bitcoin, or any digital currency. At that time Ethereum was trading at $280. I remarked that since Ethereum had started out very low and quickly rose to $280 in a very short time that the risk had greatly increased. The chart told me that something was amiss. In the next few days Ethereum shot up to $400. I again looked at the chart and told my potential client that instead of buying Ethereum you should watch for a possible move down to $300. The price ranged from $400 to $380-$350 a few times to get some more traders long as they unwittingly "bought on pullbacks" to get a better price before the price took off higher. The next big move was back down to $280. Then the price went back to near $400 again and whipsawed back and forth in a range to create alot of excitement as the headlines everywhere trumpeted that Ethereum had gone up 3000% and was going to overtake Bitcoin soon and become the next great crytocurrency. Once I saw that I knew for sure that Smart Money was at work. It all made sense:
Yesterday's Ethereum flash crash is similar to the recent British Pound flash crash and others where unsuspecting traders lost vast sums of money. Those traders always call for an investigation into manipulation but the regulatory "authorities" maintain that it was caused by a computer glitch or other unexplained anomaly and close the book.