Ethereum (ETH) was $0.10 yesterday.
Trust me. It actually happened. But don’t kick yourself if you didn’t buy during the dip, it happened so fast that you probably wouldn’t have had time.
Yesterday afternoon, GDAX experienced a flash crash, and Ethereum dropped in value from $319 to $0.10. This kind of crash has happened before on other exchanges, specifically Kraken. But this time, a lot of investors noticed, which means it’s time to talk it out.
The crash had two central culprits:
- Starting on Wednesday, the Ethereum network was inundated with a backlog of Ethereum transactions from the badly put-together Status ICO.
- In the already messed up network, someone offloaded over 100,000 ETH in one go. That’s above $3 million in ETH sold in a second. This action initiated many orders and forced some people to buy and others to sell. In the end, we were left with a stabilized price of $320.
Now, before you panic and leave Ethereum because of this volatility, know that the network should go back to normal after the Status ICO backlog is cleared.
But once again this outlines Ethereum’s volatility. Nothing else is like this, which means it’s important to stay educated.
And that brings us to our central conversation: why this happened.
Let’s start with the Status ICO and what it did to the Ethereum network.
How the Status ICO Affected Ethereum
Stupidity is alive and well in the digital currency realm.
Stupid investors are disrupting Ethereum’s growth by investing in initial coin offerings (ICOs). They dump money into companies that are unproven, meaning their investment may not appreciate in the long term. Now, I am not saying that all ICOs are stupid. But a majority of them raise far too much capital for the product it offers.
Either way, the heavy transaction rate with ICOs clogs up the Ethereum network. Status raised $64 million in one day. That’s a lot of volume for even the top exchanges to handle. And that’s why we have seen Ethereum struggle to hold $350.
I hope that eventually, bad ICOs will act as a kind of digital currency Darwinism and discourage or teach investors how to handle their digital currency. Then Ethereum will continue on its original mission, instead of being used as an exchange for less promising technologies.
And that brings us to our second point.
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How Big Sells Affect Ethereum
We call the people who manipulate Ethereum’s price “whales.” These investors often sell massive sums of ETH in a coordinated swoop. This triggers other investors’ limit orders and stop orders in GDAX.
In the end, this kind of manipulation makes the whales a pretty penny.
I can almost guarantee that the whale who offloaded 100,000 ETH had a lot of buy limits set before they took action.
This kind of manipulation isn’t exclusive to the digital currency market. A coworker and I had a conversation this morning about how this happens in stocks, as well. People always manipulate prices.
But everyday investors can protect themselves by becoming familiar with GDAX’s limit and stop orders. For those of you who don’t use GDAX, it’s actually connected to Coinbase. That means if you log in with your Coinbase credentials, you already have an account on GDAX.
Once you are inside, you will be able to see trades in real time. You can also set your stop and limit orders.
If you don’t invest in stocks, orders might be a bit confusing. This is where old world investing meets digital currency. It’s important to know what you are doing; otherwise, you can get burned (as many Ethereum investors did yesterday).
We cover these kinds of investment security measures extensively in our regular newsletter. Sign up below for more updates.
Best of luck!
P.S. You can find me on Twitter @AlexandraPerryC. I won’t tell people when to buy and sell, and I don’t give private investing advice. But if you have questions about the subjects we discussed in an article or need clarifications, I’m happy to provide answers, and I try to return tweets hourly.