GDAX the exchange from Coinbase company has recently executed all the buy orders all over to almost 10 cents.
All started with a multimillionaire sell that executed orders dropping from $342.02 to $296 what created a chain reaction on the stop-losses positions that in a matter of seconds dropped the price all to almost 10 cents and got recovered seconds after.
No money got stolen or lost in that wasn't also a bug, but the way it should work. To proceed I will explain a few key points:
- How a stop-loss order works
- What is a circuit-break
- Why circuit-break doesn't work with cryptocurrencies
- How GDAX could avoid that problem
Disclaimer, I'm not a professional trader and this is not a trade advice post.
How a stop-loss order works
As you can see in the image on the left when the market hit the limit price the amount will be traded until it's all converted or the market goes above the sell limit.
What is a circuit-break
In the regular stock market, when a chain reaction happens and the percentage wise change is too high, it will trigger a circuit-break and shut down all the transactions for a period of time, adding time to people think and do not panic react to the situation.
A good example is that a few weeks ago Brazilians had a circuit-break when after an investigation went public that potentially could impeach the president, too many USD orders started to be executed dropping the value of the BRL with the uncertain future panic. This circuit-break hold the transactions for an entire day and after the panic pass, they resume the operations with a lower volume being traded and stopping the devaluation of BRL related to USD. More details.
Why circuit-break doesn't work with cryptocurrencies
Most of the assets exchanges are centralized. Fox example, US companies stocks have their US exchanges to trade it, when the company has stocks in another country the trades must happen in that country exchange. So a circuit-break make sense in those markets. When they're activated nobody can trade.
That is not possible with cryptocurrencies or assets based on public blockchains. Imagine the situation where GDAX implement a circuit-break and there is a crash on the Etherium, where it is losing huge amounts the value over all exchanges, that would trigger a "circuit-break" in GDAX, but potentially would not in the other exchanges.
In a situation like that, who is trading at GDAX would have an exchange disadvantage, since they're locked and can't liquidate their assets, and they will keep looking it lose value until the "circuit-break" is disabled where people in other markets can freely trade their undervalued assets.
"With great powers, comes great responsibilities".
This problem was a human mistake and if the people had a better understanding of the tools they use that problem would not happen. What that leads to my next topic.
How GDAX could avoid that problem
The Advanced option hidden by default allows the trader to set where he wants to stop trading. However, if the user doesn't set that option, the limit will be 0 what can lead to a chain reaction like that.
GDAX not should only always display that option, but also warn the users that a zero value in that field can lead to unpredictable consequences.
Conclusion
GDAX is a new exchange and with Coinbase introduces all their users to advanced trading tools without any tutorial or deep explanations of how each tool in the exchange works.
They failed to provide a good users experience and induced their amateur traders to do a very dangerous operation while in their minds they thought the limit-sell would protect their funds.
The tools worked as correctly as expected, there are no ways to revert the losses for who fall in that trap and many people probably profited from those poor traders.
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Bicoin
1DhWEwa3YhXC8JbbZjwpxiZKqb9dfYRAyY
Ethereum
0xe05342A02D8F6708cd007a9E7a722ef8427cb640
