A technical glitch has resulted in a brief but monumental crash in the price of ethereum, an alternative digital currency to bitcoin, demonstrating the apparent volatility of the cryptocurrency market. According to recent reports, the price of etherium flash crashed in a matter of seconds from around $319 to 10 cents on cryptocurrency exchange GDAX. This, following a multi-million dollar market sell order.
According to the report, the cryptocurrency had been trading as much as $352 on Wednesday. However, a multi-million dollar market sell order posted at around 12:30 p.m. PT prompted a number of orders being filled from $317.81 to $224.48. Along with the persisting price decrease, another set of 800 stop loss orders and margin funding liquidations caused the cryptocurrency to trade for as low as 10 cents.
To put into perspective, a stop loss order is a type of trade that is automatically implemented in the event that security hits a particular price. On the other hand, margin funding meant trading with borrowed funds. In addition, liquidation occurs when both are closed automatically to prevent further losses. The flash crash, which marked a more than 96% decline in ethereum prices, was so severe that GDAX’s U.S.-based operator Coinbase disabled the ETH/USD pair trade and blocked ether withdrawals.
GDAX received flak on social media over the flash crash, with many speculating that an illegal activity might be behind the apparent crash. However, GDAX denied such allegations.
“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, We are continuing to conduct a thorough investigation and will keep customers updated with any resulting actions,” said Adam White, the vice president of GDAX.
On the other hand, the news did not sit well among ethereum traders, many of whom blamed the company for its alleged lack of proper controls. The outraged traders even accused whoever initiated the sell order of market manipulation.
The root cause of ethereum’s flash crash
A faulty initial coin offering caused ethereum’s short but otherwise devastating flash crash recently, an Ehereum reddit user explained. According to user emansipater, a badly-designed Status ICO was the key driver in a selling spree that occurred at around noon.
“The badly designed Status ICO clogged up the network yesterday with a huge number of high gas fee transactions, most of which are failing but still filling up the blocks and preventing normal tx’s from getting in. In addition, dwarfpool and perhaps others have set bad defaults on their client software that both actually cost themselves money and also prevent the network from automatically adapting to larger gas volumes the way it’s supposed to. So now, even though the Status ICO is over, there are still a huge number of transactions clogging up the network and the only way to get transactions in is to pay huge fees (which most of the exchanges probably don’t want to do). Until it clears out, people are going to be missing ENS auctions, unable to withdraw from many wallets and exchanges…,” the explanation read, as reported in ZeroHedge.com.