The increasing popularity of Ethereum
Ethereum is a new name among those who aren’t really into cryptocurrencies. You often hear it called “the cryptocurrency of the future.” Well, there are very good reasons for this. How about the fact that companies like JP Morgan Chase, Microsoft, and Intel are betting on the Ethereum system against Bitcoin’s blockchain? A few months ago, these corporate giants formed the so-called Enterprise Ethereum Alliance (EEA), under which a decentralized digital network would be formed to build and implement the program behind Ethereum.
The news about the EEA, which came out late in February, gave solid support to the Ethereum system and its currency unit, Ether. The ETH/USD rate surged from under 15.00 before the news broke to around 50.00 in late March. The next jump came during the March-May period and pushed the quotation to 90.00. Yet, it was the third bullish wave that made Ethereum super-popular among less enlightened crypto enthusiasts and even among regular people. This wave hit in late May, when ETH/USD soared from around 90.00 to 199.00. It then went on to reach 400.00 in mid-June.
The lightning speed of Ethereum’s growth roused lots of enthusiasts, who were ready to double their investment in the shortest time possible. Who could afford to ignore the Ethereum case at that point? It was indeed a great opportunity and the risk was amply rewarded despite the high volatility.
But then came June 21 and brought what I would call a total short-term collapse. An almighty crash in Ether’s price sparked questions among serious investors, who wanted to know whether it made sense to continue betting on the cryptocurrency’s potential.
I would also like to take a position, but only after telling you the story of this crash.
How the collapse happened
It took place on GDAX, the largest exchange for cryptocurrencies. On Wednesday afternoon, Ethereum’s price collapsed from over $317 to as low as 10 cents within seconds. This is a 99.9% plunge – a textbook example of volatility, right? Those who were monitoring the price could have missed this quotation because it bounced back to over $310 only a few moments later. However, there were many people who couldn’t ignore that event. Those were the investors who had open positions and lost their stakes, either because stop-loss orders were triggered or the margin calls did the job and the funds were instantly liquidated. In short, millions of invested dollars disappeared in the blink of an eye.
It seems that the cause of this short-term crash was a multimillion-dollar sell order. It means that someone tried to bet against the bullish Ethereum trend. This event triggered a drop to under $250, but soon a domino effect started as the initial drop caused over 800 stop losses to work and margin funds to be liquidated. Control was lost to the point where you could buy Ether “tokens” for 10 cents.
The explanation involving the huge sell order comes from Adam White, the vice president of the GDAX exchange.
The first question for many investors ran along the lines of “So that’s it? All the millions are gone?”
However, GDAX came up with some good news shortly after the event. It showed how much its officials want investors to retain their confidence in the future of Ethereum. In short, the popular cryptocurrency exchange has undertaken to recover the financial losses suffered by investors engaged in margin trading. The related statement is published on the official GDAX blog.
Initially, GDAX officials announced they would not refund the losses after the incident. However, they quickly changed their mind and came forward with the good news. According to the official statement, the exchange is ready to use its own funds to reimburse the flash-crash victims. As a result, investors who had open positions during the incident and lost their money will get compensated.
What should investors do next?
Now, the event scared many investors and weighed heavily on Ethereum demand. At the time of writing, the price has fallen under $250. Still, this should be considered a short-term phenomenon since the bullish nature of the cryptocurrency remains intact.
On the other hand, investors should understand that such problems may still occur. The risk will exist until exchanges implement a system where unusually large orders are split into smaller pieces and dispersed so that they can’t affect the market.
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