Ethereum "flash crash" explained

The cryptocurrency Ethereum experienced a "flash crash" this Wednesday, when the price quickly fell from about $296 to a low of 10 cents in a matter of minutes.

But as quickly as it collapsed, the price bounced back, and at 11.25 a.m. on Thursday, Ethereum was trading back at $342.02.

So what happened?

The price crash came from GDAX, one of the main Ethereum exchanges. A "multimillion-dollar" sell order caused the initial price dip, but the real problem was the domino effect afterward. The initial fall triggered 800 stop losses — automatic sell orders that are placed once an asset hits a certain price — and margin funding liquidations, which is where investors trading with borrowed money had their positions closed to stop them losing any more money.

Essentially, the large sell order created a flood of other sellers. With not enough buyers to mop up demand, the price collapsed as programmes executing the trades tried to find a price at which buyers would step in and fill the orders.

Charles Hayter, the CEO and founder of the digital-currency information provider CryptoCompare, told Business Insider in an email: "Thin order books and large trades are the usual culprits in these scenarios. Liquidity that isn't unified but spread across multiple isolated pools can be vulnerable to large sell orders that drop prices rapidly. This can then trigger panic in the market.

"Most likely someone with little experience was trying to exit a position and ate through all the liquidity — although it could have been a fund manipulating the market by shorting Ethereum and then crashing the market and stimulating panic."

White said in his GDAX blog post: "Our initial investigations show no indication of wrongdoing or account takeovers. We understand this event can be frustrating for our customers. Our matching engine operated as intended throughout this event and trading with advanced features like margin always carries inherent risk."

Ethereum, the world's second-largest blockchain, was conceived in 2013 by a developer involved in bitcoin and launched in 2015. The open-source network can be used to build "smart contracts" and other applications that involve data sharing.

Ethereum "tokens," officially called Ether, are used to power the network, and as the digital currency has become more popular, the value of these tokens has spiked. Ether has risen from about $11 a token in January to well over $300.