Over the span of a few hours today, December 7, 2017, Bitcoin’s price sky-rocket to over $19,000 on the popular cryptocurrency trading platform Coinbase – only to plunge back down to $16,000. Incredibly, the rapid decline in value from over $19,000 to $16,000 happened within the course of a few minutes, all while many users found themselves locked out of their accounts and unable to capitalize on the record high-price. In a statement, Coinbase explained that its web services slowed down (and in some cases shut down) due to “all-time high traffic – 8x the peak [Coinbase] saw in June.”
Server Failure Reminiscent of GDAX Ethereum Flash-Crash
Coinbase’s ill-timed server failure is reminiscent of the GDAX Ethereum flash-crash in June of 2017. GDAX is Coinbase’s trading platform for sophisticated cryptocurrency investors. In about one second, the price of Ethereum flash-crashed from $319 to approximately 10 cents due to a $12.5 million trade and a series of margin calls on leveraged investors’ accounts. As a sign of good faith and taking corporate responsibility, Coinbase reimbursed traders who suffered losses due to the event – a gesture that apparently did not deter the U.S. Commodity Futures Trading Commission from making inquiries into the matter in October of this year.
Operating in the cryptocurrency space is fraught with uncertainty. As explained in a recent New York Times feature, Coinbase rapidly became the most popular cryptocurrency exchange in the world over this past year – expanding by almost 100,000 new customers per day as of November. As Coinbase’s popularity (and annual income) continues to grow, it will only face greater logistical, regulatory, and legal challenges.
Difficulties Navigating Securities Laws Did Not Deter Everyone
We wrote shortly after the GDAX flash crash about the potential securities laws implications of conducting “Initial Coin Offerings,” which are investment ventures that raise funds for either a new cryptocurrency or collect seed money for a traditional venture in the form of cryptocurrency (rather than fiat currency). Yet, the difficulties of navigating securities laws didn’t deter at least one group of investors from forming a Bitcoin ETF – Bitcoin Investment Trust (Ticker GBTC) in May of 2015. As of the time of this writing, GBTC has a market cap of $3.1 billion and has appreciated in value by almost $1,800 per share since its inception.
We always advise our clients to carefully consider the suitability of an investment and their other investment options before making an investment decision. Retail investors should realize that there is a potentially limitless downside risk that comes with investing in cryptocurrency-derived investment vehicles. Likewise, as we learned today, the risks of investing in cryptocurrency directly could very well include suffering a near-instantaneous $2,000 loss – all without the ability to access and sell your holdings to limit those losses (or perhaps, cash in on your newfound gains).