When Cryptocurrencies Crash

Are they out for the count?

Cryptocurrency commentators have lamented the structural weaknesses of Bitcoin for years. Bitcoin may be the biggest blockchain based platform, but it’s one of many other currencies that are making an impact in finance. These issues are as much of an issue for them as for the leading competitor, as Ethereum found out last month. This June, the cryptocurrency suffered a flash crash of 99.9 per cent on GDAX, Coinbase’s professional crypto exchange. The malfunction was caused by a multimillion dollar sell order that was simply too large for the infrastructure to handle, leading to 800 automatic liquidations. After briefly dropping to $0.10, Ether’s price eventually returned to its usual rate. . . but not before millions of dollars had already been lost. Can the cryptocurrency scene recover from this catastrophic failure – and how?

The hype strikes again
Sadly, the Ethereum crash wasn’t particularly surprising. The cryptocurrency scene is currently reeling from a number of structural mishaps caused by a disjuncture between supply and demand. Daily cryptocurrency trading has increased 20 times since the beginning of the year, and the number of options just keeps on growing. Unfortunately, this astounding growth has not been met with appropriate market development. Coinbase itself also began to crash as so many people were trying to make transactions. Simply put, blockchain technology isn’t ready for mass usership. Yet again, we’re looking at an overhyped technology without the structure it needs to work properly. In the past, this has stunted innovation – Virtual Reality in the 1990s is the most poignant example – and it could easily do so again. The Ethereum escapade highlights the outstanding setbacks with blockchain technology, as well as the exchanges that process digital payments. Although GDAX reimbursed investor losses from company coffers, arguably the crash should never have happened. If other currencies aren’t worried about the same thing happening to them, then they should be. If it can happen to the second largest payment platform in the world, then it can happen to anyone. Could this be the end for alternative digital currencies?

A cryptic future
The Ethereum crash, along with obvious issues in blockchain infrastructure, could potentially signal the beginning of the end for cryptocurrencies. This is mostly to do with confidence. Ethereum may have recovered its currency valuation, but it has certainly suffered serious damage to its image. Any cryptocurrency with a considerable following is bound to experience delays and crashes, which is likely to discourage customers. Even so, these fundamental failures could be the kick that the cryptocurrency scene needs to deal with underlying issues. The problems experienced by GDAX and Coinbase show that exchanges need better safeguards so that crashes can be prevented. One potential solution is Omega One, a platform that breaks up large sell orders into manageable chunks. Omega One will launch later in the year, no doubt followed by a string of similar services. So, as worrying as cryptocurrency crashes are, it’s not all bad news. It could be exactly what the sector needs to accelerate market development, as well as presenting an opportunity for new cryptocurrencies, FinTech startups and platform developers. As soon as the crypto community can formulate a relevant response, then digital payments will continue to disrupt fiat currencies on a far greater scale.

If digital currencies are going to survive, redesigning the cryptocurrency infrastructure is a necessity. Instead of chasing mass usership, payment platforms need to make sure they can handle the number of transactions they already have. Adding services like Omega One to crypto exchanges is the first step towards addressing ambitious sell orders. Customers also need to be more informed about how to use cryptocurrencies in the best way possible. And if established players aren’t willing to change, there will be a plethora of disruptive FinTech startups ready to take their place. Ultimately, there’s still hope for cryptocurrencies – provided they put their efforts into developing a quality infrastructure before saturating the market. It won’t be an easy task, but we can safely say it will be worth it.

Will Ethereum recover from the flash crash? How should cryptocurrency stakeholders react to increasing problems? Can market development catch up to the hype? Share your thoughts and opinions.