CFTC Investigating Ethereum Flash Crash
3 min read

CFTC investigating Coinbase for Ether Flash Crash

By Editorial Team

Back in June, the price of Ethereum crashed falling from $317 to 10 cents for a few milliseconds on Coinbase. It managed to recover quickly and the exchange offered to reimburse those traders who were impacted by it.

Now, the CFTC is interested in investigating the matter and particularly what role leverage had to play in the matter. They are also examining if there were any other factors that could have impacted on the price and caused the flash crash.

Leverage is where traders can enter trades with positions that are sometimes much larger than the amount they have available in their accounts. In the case of Coinbase, the leverage is 3:1. Hence, if you have one Bitcoin worth $4k then you can enter trades that are up to $12,000 in value.

This shows that the regulators in the USA are being proactive when it comes to digital currency regulation. For example, the Securities and Exchange Commission recently charged a man for promoting a fraudulent ICO. The SEC has also charged numerous Bitcoin Ponzi Schemes.

The CFTC on the other hand is in charge of the regulation of swaps and other derivative instruments. Given that Coinbase has issued these, they would fall under the scrutiny of the CFTC.

A Single Trade?

There were rumours that the cause of the flash crash was a single trade that was put through for $12.5m. This trade spooked the market and hence prompted selling by other investors. Many of the Coinbase traders had set up automatic stop orders once the price had fallen to a particular level.

These stop orders were therefore executed automatically which meant that quite a few traders faced large losses. Moreover, the stop orders created a chain reaction as more positions were liquidated. Coinbase also had to automatically liquidate traders with margin positions which could have further exacerbated the problem.

It appeared as if the sell order came from one of the first Ethereum blocks from 2014. This means that the buyer must have taken part in the Ethereum ICO where ETH was sold at 30 cents.

Although at this stage it looks as if the investigation is only in an exploratory stage as the CFTC sent a list of questions to Coinbase around the topic of margin trading. Coinbase has since suspended margin trading as a result of this crash. In a statement they said

As a regulated financial institution, Coinbase complies with regulations and fully cooperates with regulators. After the GDAX market event in June 2017, we proactively reached out to a number of regulators, including the CFTC. We also decided to credit all customers who were impacted by this event. We are unaware of a formal investigation.

In the end it seems as if the only party that was harmed by the crash is Coinbase as they have made whole on losses. It does, however, illustrate the risks of margin trading on cryptocurrencies with current market conditions.

Featured Image via Fotolia

Editors at large. Posting the latest news, reviews and analysis to hit the blockchain.
View all posts by Editorial Team -> Best Crypto Deals ->

Latest Posts

Huobi Global Review
Huobi Global Review 2022: Good Exchange with DEEP Liquidity
Huobi Global Review

Huobi Global Review 2022: Good Exchange with DEEP Liquidity

June 29, 2022 37 min read
FTX vs FTX US Review
FTX vs FTX US: Which one is BEST for You?
FTX vs FTX US Review

FTX vs FTX US: Which one is BEST for You?

June 27, 2022 14 min read
Bancor Review
Bancor Review: Impermanent Loss Protector?
Bancor Review

Bancor Review: Impermanent Loss Protector?

June 22, 2022 15 min read
Bridge Mutual Review
Bridge Mutual: Insurance for your Crypto
Bridge Mutual Review

Bridge Mutual: Insurance for your Crypto

June 22nd, 2022 22 min read
Serum Review
Serum Review: Solana’s One-Stop DeFi Toolbelt
Serum Review

Serum Review: Solana’s One-Stop DeFi Toolbelt

June 16, 2022 17 min read
Raydium Review: Solana’s DeFi Liquidity Mammoth

Raydium Review: Solana’s DeFi Liquidity Mammoth

June 11, 2022 17 min read
crypto com
Crypto.com Exchange Review 2022: A World-Class Crypto Exchange
crypto com

Crypto.com Exchange Review 2022: A World-Class Crypto Exchange

June 14th, 2022 30 min read

Related Posts

Huobi Global Review
Huobi Global Review 2022: Good Exchange with DEEP Liquidity
Huobi Global Review

Huobi Global Review 2022: Good Exchange with DEEP Liquidity

June 29, 2022 37 min read
FTX vs FTX US Review
FTX vs FTX US: Which one is BEST for You?
FTX vs FTX US Review

FTX vs FTX US: Which one is BEST for You?

June 27, 2022 14 min read
Bancor Review
Bancor Review: Impermanent Loss Protector?
Bancor Review

Bancor Review: Impermanent Loss Protector?

June 22, 2022 15 min read
Bridge Mutual Review
Bridge Mutual: Insurance for your Crypto
Bridge Mutual Review

Bridge Mutual: Insurance for your Crypto

June 22nd, 2022 22 min read
Serum Review
Serum Review: Solana’s One-Stop DeFi Toolbelt
Serum Review

Serum Review: Solana’s One-Stop DeFi Toolbelt

June 16, 2022 17 min read
Raydium Review: Solana’s DeFi Liquidity Mammoth

Raydium Review: Solana’s DeFi Liquidity Mammoth

June 11, 2022 17 min read
Top Desktop Crypto Wallets
The 8 Best Desktop Wallets in 2022
Top Desktop Crypto Wallets

The 8 Best Desktop Wallets in 2022

May 30, 2022 16 min read