Will There Be Another Ethereum Flash Crash?

Ethereum Flash CrashWhat Is Ethereum Flash Crash?

It wasn’t a bad dream, dear reader. The “Ethereum 10 cents” posts, tweets, and videos floating around the Internet were real. The Ethereum flash crash was real. In the blink of an eye, ETH prices plunged from $320.00 to $0.10 on the GDAX exchange. Can it happen again?

That is the question haunting investors in the aftermath of the flash crash. It may explain why the Ethereum price is down more than 20% since the crash. The market is drenched in fear.

Here’s what happened:

  1. Some idiot sold a ton of ETH tokens, which pushed prices down.
  2. The sale triggered stop-loss orders, which pushed prices down further.
  3. Every time the price moved down, new stop-loss orders were triggered.
  4. A vicious cycle ensued.

Coinbase—the owner of the GDAX exchange—bungled its response to the crisis. At first, the company seemed to shrug off the problem, saying “tough luck” to the traders that suffered losses. Eventually, it came to its senses.

We will establish a process to credit customer accounts which experienced a margin call or stop loss order executed on the GDAX ETH-USD…This process will allow affected customers to restore the value of their ETH-USD account to the equivalent value of their ETH-USD account at the moment prior to the rapid price movement.

(Source: “ETH-USD Trading Update #2,” The GDAX Blog, June 23, 2017.)

Translation: Here’s your money back. Please don’t leave us!

Coinbase understood, rightly so, that GDAX Ethereum trades would evaporate if investors lost faith in the system. Who wants to take the risk of losing all their money?

So that problem is resolved. But it doesn’t answer our question: Can this happen again?

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Is Ethereum Trading Risky?

While another Ethereum flash crash is technically possible, I urge you to remain calm. Flash crashes happen on the stock market as well.

The rising influence of algorithmic stock trading is partly to blame. Automated orders react instantly to price drops without pausing to consider why. But then again, if the computers pause to consider why, we have bigger problems on our hands. So perhaps we should be thankful they don’t.

On a more serious note, the history of flash crashes is disturbing.

Some of you will remember May 6, 2010. It was the first major flash crash, and it happened on the stock market. The Dow Jones Industrial Average lost nearly 1,000 points in under 10 minutes. Just like with the Ethereum flash crash, fear was everywhere.

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I understand if this explanation does not reassure you. It isn’t helpful to say, “Hey, I know you barely survived that bridge collapse, but don’t worry. Bridges are collapsing all across the country!”

But it’s important to remember what happened after the 2010 stock market flash crash. Namely, that the market recovered. After bouncing back, the Dow proceeded to advance 97% to where it is today. And it accomplished these gains in the middle of a weak economic recovery.

DJI_flashcrash

Chart courtesy of StockCharts.com

With that in mind, would you call a long bet on the Dow “risky?” After all, flash crashes still happen on the stock market. Should that continue to scare you so much that you put your money under the mattress instead?

Of course that’s not the answer. We can’t live in fear of hypothetical events, particularly when we didn’t lose any money in the supposedly “traumatic” event that just happened. Everyone got their money back—all is well.

Besides, the market simply needs enough confidence to prioritize long-term factors over freak short-term price movements. That is what insulates the Dow and S&P from the persistent problem of stock market crashes.

Investors see them happen and realize, “Oh, we’ve seen this one before. I know how this movie ends.” And everyone just moves on with their lives.

Coinbase tried to instill a similar sense of confidence in Ethereum. It started to work, but was then undercut by an Internet hoax claiming that Ethereum’s founder, Vitalik Buterin, is dead.

He is not.

Buterin posted a picture of himself with evidence that he is still alive. That said, the hoax stirred a lot of unnecessary volatility into the Ethereum price prediction.

As a result, ETH prices may take a little longer than expected to heal, but history suggests that the Ethereum flash crash will be nothing more than a bump in the road. So try not to panic; try instead to find a silver lining.

Maybe this is a chance to buy Ethereum at a discount.