Crypto veterans will remember the June 21, 2017 GDAX flash crash, where the ETH/USD market experienced a rapid 99.96% price drop of ETH from $317 to $0.10 in a matter of seconds.
What happened?
On 21 June 2017 at 12:30 PT, a multimillion dollar market sell of ETH was placed on the GDAX ETH/USD order book. Due to a thin order book, the massive market sell off caused buy orders to be filled from $317 to $224, translating into a book slippage of 29.4%.
This slippage started a cascade of approximately 800 stop loss orders and forced liquidations of long positions, pushing the price further down, causing ETH to trade as low as $0.10 for a few seconds before completely recovering to around $300.
Moments before the crash, one trader placed an order to buy 3,809 Ether at the price of $0.10. With ETHs price recovery, in seconds, that Ether was worth $1,124,700, resulting in a 300,000% return for the trader.
Why Was Such a Drop Possible?
On traditional markets, flash crashes have happened before, such as the 2010 flash crash which saw the Dow Jones index lose 9% in a matter of minutes. As is usually the case when comparing the cryptocurrency market with traditional markets, the GDAX flash crash was much more extreme.
It is speculated that the same trader who made the trade of a century also orchestrated the flash crash themselves with a multi-million dollar market sell because they noticed:
- That GDAX had no internal protocol to automatically halt trading of an asset after it drops a certain percentage quickly.
- The thin buy order book.
- The abundance of stop loss orders. Stop loss orders which are placed by traders to market sell their assets after they drop a certain amount.
- The amount of leveraged longs. When a leveraged long is margin called, the exchange sells the collateral at market price in order to prevent further losses.
The Aftermath
Coinbase, the company that operated the GDAX exchange, stated that the official investigation showed no indication of wrongdoing or account takeovers and reported that their matching engine operated as intended through the event.
Citing their terms&conditions, they reminded customers that margin trading carries inherent risk, and that no trades will be reversed.
The company was facing a public loss of trust and potentially even lawsuits from disheartened traders. Eventually, the came out with a second public release and stated that every trader that got margin called or had their stop loss orders executed will be credited for the lost amount with Coinbase’s own funds.
The Wonder of Market Forces
After news of the traders incredible return of investment went around, traders started putting in limit buy orders at price levels they knew were unlikely to get filled, hoping to make a huge profit in the event of another flash crash.
In doing so, traders consolidated the buy order book and increased support levels at all prices, reducing the chance of such a flash crash happening in the future.
Source: https://coincodex.com/article/2272/300000-return-in-a-few-seconds-the-2017-gdax-flash-crash/