Ethereum Exchange Reimburses Customer Losses After 'Flash Crash' (gdax.com)

An anonymous reader writes: "The price of ethereum crashed as low as 10 cents from around $319 in about a second on the GDAX cryptocurrency exchange on Wednesday," reports CNBC, calling it "a move that is being blamed on a 'multimillion dollar market sell' order... As the price continued to fall, another 800 stop loss orders and margin funding liquidations caused ethereum to trade as low as 10 cents." An executive for the exchange said "Our matching engine operated as intended throughout this event and trading with advanced features like margin always carries inherent risk."

Though some users complained they lost money, the price rebounded to $325 -- and according to a report on one trading site, "one person had an order in for just over 3,800 ethereum if the price fell to 10 cents on the GDAX exchange," reports CNBC. "Theoretically this person would have spent $380 to buy these coins, and when the price shot up above $300 again, the trader would be sitting on over $1 million." Yet the currency exchange announced Friday that they're honoring everyone's gains, while also reimbursing customers who suffered losses. "We view this as an opportunity to demonstrate our long-term commitment to our customers and belief in the future of this industry."

Comments

THIS is the danger.

[Anonymous Coward]

Manipulation without oversight distributed among all the different e-curencies, what a target rich environment for exploitation. SEC isn't going to investigate. Let these unregulated currencies get a foot in our REAL economy, and then watch the fireworks when these flash-crashes tank a REAL bank.

Re: THIS is the danger.

[guruevi]

First of all, this indicates they have the ability to which is a huge hole in any cryptocurrency system. Basically the company behind the currency has full power over the blockchain.

On the other hand, even if they won't change the records, they have to refund this money somehow, this will require inserting millions of dollars worth of value in the system that isn't backed by the traditional method of obtaining cryptocurrency.

This is a solved problem

[mehrotra.akash]

Why dont crypto currency exchanges learn from the history of stock markets? This is a known issue and is solved in stock markets using "Circuit breakers" : http://www.investopedia.com/te... Will exchanges go through all the teething problems that stock markets faced, or will they leverage what stock markets have learnt over the last few decades?

Re:This is a solved problem

[Areyoukiddingme]

Will exchanges go through all the teething problems that stock markets faced, or will they leverage what stock markets have learnt over the last few decades?

Considering that the exchange is both "honoring everyone's gains while also reimbursing customers who suffered losses", I'd say the person who had a 10 cent order for 3800ETH is also an operator of the exchange. So no, they're not going to leverage what stock markets have learned over the last few decades. They're profiting from it.

Re:This is a solved problem

[mehrotra.akash]

Stock market circuit breakers cap both, gains and losses at individual stock levels.. only the marketwide breakers are restricted to capping losses. Click the link in OP and scroll down a bit

Re: This is a solved problem

[KGIII]

Apps guy, sing your tune!

Re:This is a solved problem

[wisnoskij]

Guy A sells $1 million coins for pennies, Guy B buys coins for pennies. The money has been transferred and laundered. Great for covering up the origins of criminal gains or just embezzling.

Excellent

[Anonymous Coward]

Yet the currency exchange announced Friday that they're honoring everyone's gains, while also reimbursing customers who suffered losses.

People laughed when I said I was going to have two separate accounts ... well who's laughing now?

Big, big sofa

[Hognoxious]

Yet the currency exchange announced Friday that they're honoring everyone's gains, while also reimbursing customers who suffered losses.

No idea what the volume's like, but if one guy made a million buying on the dip that means somebody lost it, so they're on the hook for at least that. One guy, remember.

I wonder where an outfit that's basically a server and a domain name - and the former's probably rented - can find that kind of dosh.

Re:Big, big sofa

[Calydor]

They'll pay it in Bitcoin.

Re:Big, big sofa

[Solandri]

but if one guy made a million buying on the dip that means somebody lost it

They didn't lose it. They willingly sold it for 10 cents.

If you buy something for $300+, then program a computer to sell it for 10 cents, and it does it, the problem isn't the computer. It's the fact that you programmed it to do something stupid. While it's nice that the exchange is reimbursing people for their losses, that's a bad thing in the long run. If stupid decisions don't come around to bite people in the butt, they fail to learn the lesson and will continue making stupid decisions.

On a related note, this is why a country's currency is better (more stable) than a cryptocurrency that isn't backed by anything. With the country's currency, because the country is basing its economy on it, you can estimate a semi-accurate range of values for the currency. You avoid programming sell orders outside that range because "that's obviously stupid." With a cryptocurrency whose value is entirely based on what other people think it's worth, you can't set a range. Because everyone could simultaneously up and decide it's another tulip bubble and suddenly it's worth nothing. Unlike a currency which is based on the productivity of a country, or even gold, the value of a cryptocurrency is based entirely on how much faith its users have in its value. That's why those people thought they were doing a smart thing programming a sell order at 10 cents on a $300 investment - so they could recoup something if it crashed.

Which gets us to the real reason why they're reimbursing customers for their losses. Because if those customers become discouraged, lose faith, and quit trading in that cryptocurrency, then its price will crash - for real this time.

Re:Title wrong

[DRJlaw]

Title of article is wrong. No reimbursements were made. Read TFA

Why don't you take your own advice? From the second link:

"We will establish a process to credit customer accounts which experienced a margin call or stop loss order executed on the GDAX ETH-USD order book as a direct result of the rapid price movement at 12.30pm PT on June 21, 2017. 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. To clarify:
* For customers who had buy orders filledâSâ"âSwe are honoring all executed orders and no trades will be reversed.
* For affected customers who had margin calls or stop loss orders executedâS -- âSwe are crediting you using company funds."

Re:Title wrong

[Anonymous Coward]

I don't seem able to edit or delete my comment[.]

You must be new around here.

You completely miss the point here.

[Interfacer]

These are rollbacks on exchange accounts. Those transactions never entered the blockchain. An exchange account is like an IOU while the exchange backs those IOUs with real coin in an internal wallet until such time as you send a coin transfer from your account to an external address. Only then do the transaction get recorded in the blockchain.

What GDAX is doing is simply restoring those IOUs for people whose IOUs got wiped out. At the same time, they allow the people who scooped up those IOUs for cheap to keep them, whether they are still there or not. Since part of their own assets are company owned coin (which is probably separate from the exchange hot wallet) all this means is that they suck up the financial hit for the sake of PR.

The blockchain was not altered in any way. There are no holes, and it is only possible for GDAX to reimburse the GDAX customers that were affected by the flash crash.