On June 21st Ethereum (ETH) had a flash crash hitting a low of $0.10. Although ETH has since recovered, the question remains will a flash crash happen again?
To better grasp the possibilities of possible future flash crashes it’s important to understand what triggered the ETH crash Wednesday. The official statement written by Adam White, VP of GDAX, explain why and how this flash crash happened. The statement points to a multimillion dollar market sell that was placed on the GDAX ETH-USD order book around 12:30pm PT. This order translated into a 29.4% book slippage from $317.81 to $224.28. This triggered a snowball effect because many people had stop losses and trade margin. There were approx. 800 stop loss orders and margin funding liquidations causing ETH to fall to $0.10. Since the flash crash, the market has rebound and is at $326.94 as of Friday morning.
I believe this flash crash was a great lesson for the crypto community, especially new traders. This is a free market system. Just as Adam White said in his statement, “this event can be frustrating for our customers… trading with advanced features like margin always carries inherent risk.” In a free market, you are free to win and free to lose. The lesson here for stop losses/margin trading is it cuts like a butter knife when favorable but slices like a surgeon scalpel when unfavorable. So, will this happen again? I think so. The crypto market is highly volatile and there are equally great amounts of winning and losing potential in this risky environment. Its import to be careful and weigh out all possibilities when using stop losses and trading on margin.
Sidenote: There have been conversations around implementing circuit breakers to ease the loss on flash crash. What do you think should have happened in this situation? Should exchanges have circuit breakers? Comment below!
https://blog.gdax.com/eth-usd-trading-update-5d8142b5bdc1
https://cryptowat.ch/coinbase/ethusd
Check out my posts on:
http://whaledesk.com/2017/06/ether-crashes-rebounds-will-happen/
