Buyers beware: Lessons from the ethereum 'flash crash'

One event this week shows why digital currency markets still have a long way to go before they're safe enough for large-scale trading.

On Wednesday afternoon, a "multimillion dollar" sell order was placed on the GDAX exchange for the digital currency ethereum. That triggered a chain of events that resulted in ethereum briefly plunging to 10 cents on the exchange.

Stop-loss orders — baked-in directives to sell an asset once it falls to a certain price — contributed to the temporary drop. The same issue contributed to the May 2010 flash crash that sent the Dow Jones industrial average plunging nearly 1,000 points only to recover minutes later. After that U.S. SEC put down a mechanism to halt stocks after sudden moves of more than 5 percent.

Wall Street has paid increasing attention to digital currencies like bitcoin and Ethereum, thanks largely to their stunning surge to record highs this year. Financial institutions also see great potential in the blockchain technology supporting the crypto currencies and some expect it could transform the world the way the internet did.

High demand for ethereum this week clogged the network, while GDAX scrambled to manage the fallout from the large "multimillion dollar" sell order and ultimately restored trading.

GDAX's Adam White said the firm is investigating the price drop. "It is important to note that these trades are final in accordance with our GDAX Trading Rules (Section 3.1). Honoring properly executed orders is critical to maintaining the integrity of an exchange," he said in the blog post.

Coinbase owns the GDAX exchange and is a popular way for ordinary investors to purchase digital currencies bitcoin, ethereum and litecoin. Coinbase reported a website outage Wednesday, and "degraded performance" on four days last week, amid a surge in traffic.

Bitfinex, the largest U.S. dollar-based bitcoin exchange, reported distributed denial of service attacks last week, as did another smaller exchange, BTC-e.

To be sure, the latest challenges of the cryptocurrency world aren't the worst the industry has seen. Last summer, a "DAO" hack drained more than 3.6 million of ethereum into another network, sending Ethereum down around $13. In 2014, the largest bitcoin exchange at the time, Mt. Gox, filed for bankruptcy and said it lost 750,000 of its users bitcoins and 100,000 of its own.

Source: Bloomberg Pro Terminal

Trader - S. Fuchedzhiev

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