This past June, on Coinbase’s GDAX exchange, Ethereum suffered a precipitous drop, falling to 10 cents from $317.81 in milliseconds before quickly recovering.
The agency is investigating a number of factors that might
have caused the plunge, focusing in on what role leveraging had to do
with it. Coinbase allows traders to borrow money, called leveraging, in
order to make bigger wagers than would otherwise have been possible. For
instance, a trader with $5,000 could actually buy or sell as much as
$15,000 worth of a token, if using 3:1 leverage.
Federal authorities getting restless
With the spate of crackdowns across the globe, from China to Korea, shows that regulators are growing interested in the largely unregulated cryptocurrency markets. The US SEC has also shown growing interest of late, particularly with respect to ICOs.
The CFTC is essentially a watchdog in the US for currency
futures, and as such companies do not usually fall under its
jurisdiction - unless they allow swaps trading, which Coinbase does.
Coinbase is cooperating
So far, the investigation is quite low-key. The CFTC sent Coinbase a letter
with a list of questions, including queries about margin trading.
Coinbase offered margin trading in March, but after the flash crash they
suspended that service.
Coinbase wrote in an emailed statement:
“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.”
The $12.5 mln trade
It was thought that the crash was caused by a single $12.5
mln trade that prompted selling by other investors. The decline
triggered automatic sell orders from traders who’d requested to bail on
the currency if prices dropped to certain levels, and led GDAX to
liquidate some margin trades. These liquidations caused further
cascades.
The $12.5 mln sell order came from an address associated
with Ethereum’s genesis block, meaning that the funds were owned by an
original investor in Ethereum’s ICO.
That ICO took place in the summer of 2014, where ether tokens were
offered at about 30 cents each. Today ether trades at nearly $300.
