Bitcoin is nothing like the stock market. Stocks and exchanges have strict rules, legal guidelines, and over a century of data. Bitcoin is rather new, operates 24/7/365, and regulates itself using a complex algorithm. Widely-used bitcoin exchanges exist to help keep prices and portfolios in check, but they’re not 100% necessary.
Ethereum, another cryptocurrency, is almost exactly like bitcoin, but with a few differences. One “ether” is currently cheaper to buy than one bitcoin. It uses digital “contracts” to allow for faster trading. Ethereum also has a committee to oversee its use and functionality.
Like bitcoin, Ethereum is rather risky and volatile. Its value can increase at a rapid rate, only to decrease just as fast (if not faster). Since the amount of ether “tokens” is small and finite, a large transaction would affect its price.
This is exactly what happened yesterday. When an Ethereum trader sold millions worth of the cryptocurrency, the price of Ethereum decreased due to the lessened demand. That’s when something strange and terrifying occurred.
Ethereum faced a “flash crash” due to the sale.
According to GDAX (a cryptocurrency service from Coinbase), the major sale of Ethereum caused the price of ether to drop from $317.81 to $224.48. When this happened, hundreds of accounts automatically sold ether tokens at low prices. This caused the price of Ethereum to drop to 10 cents at one point. Many margin traders — those who used “borrowed” Ethereum — lost their ether in the process.
This caused chaos on the Ethereum market.
Due to the flash crash and GDAX/Coinbase’s software, many users lost thousands in Ethereum. One user had their ether tokens sold at 10 cents each without their explicit permission, causing them to lose $3,000 in the process. Other margin traders lost their entire stake in Ethereum without warning. Though users blame Coinbase’s service for not working, the company claims nothing malicious or illegal took place. These users will likely have to cut their losses and move on.
This serves as a warning to prospective bitcoin and Ethereum users.
In most cases, stock exchanges prevent such drastic drops and losses of one’s entire stake. In the cryptocurrency market, such things are not regulated at all. This isn’t the first flash crash of a cryptocurrency, and it won’t be the last. Due to Ethereum and Bitcoin’s volatility, massive drops in value can and will happen. This is why they’re some of the riskiest investments you can make.
If you invest in bitcoin or Ethereum, you can make gains never before seen on the stock market. You can also see massive, career-ending losses in a mere second. Though Ethereum is back up to a “normal” price above $300, it could always suffer the same fate again.
If you are a new investor, you might want to steer clear of bitcoin and Ethereum. You won’t make as much money in such a short amount of time on the stock market, but you won’t wake up to a zero balance one day.