Coinbase’s Bailout of Ethereum Traders; Was it the Right Move?

By
Joseph Young @iamjosephyoung
June 28, 2017

On June 24, Adam White, the vice president Coinbase’s flagship digital asset exchange GDAX, revealed that the company will reimburse around $1 million to bailout traders that experienced large losses amidst a flash crash of Ethereum on the GDAX trading platform.

“We will establish a process to credit customer accounts which experienced a margin call or stop loss order executed on the GDAX ETH-USD order book as a direct result of the rapid price movement at 12.30pm PT on June 21, 2017. This process will allow affected customers to restore the value of their ETH-USD account to the equivalent value of their ETH-USD account at the moment prior to the rapid price movement,” announced White.

Some experts and analysts including Litecoin creator and former Coinbase director of engineering and Charlie Lee expressed their appreciation towards Coinbase and its exchange GDAX for attempting to secure the trust of their traders, investors and users by taking full responsibility of an abrupt and unexpected flash crash on GDAX.

White along with the GDAX development team explained that the decision of Coinbase to reimburse traders with company funds was established as a larger part of the long-term ambition of GDAX to become a global leader in the digital currency exchange market for large-scale institutional investors, professional traders and casual users.

However, a portion of the community including prominent bitcoin trader and analyst WhalePanda criticized Coinbase for its bailout of Ethereum investors as it may set a bad precedent for both the company and the market moving forward.

In an official company update entitled “ETH-USD Trading Update #2,” White offered an analytical evaluation of the flash crash and reaffirmed that all of the trades during the week of the flash crash were executed properly. Simply put, the GDAX trading platform and its infrastructure which processes and settles trades executed properly throughout the week.

“We are confident that all trades this week were executed properly, however, some customers did not receive the quality of service we strive to provide and we want to do better,” wrote White.

The flash crash was a direct result of a multi-million dollar sale of Ethereum’s native token Ether which ultimately led the price of Ether to plunge within minutes. Some orders revealed that Ether was traded at $0.1, at a rate significantly cheaper than Ether’s current price of $261.

Extreme volatility and fluctuation of the cryptocurrency market is widely recognized and acknowledged. Hence, despite the losses of its customers and traders, GDAX shouldn’t have been blamed as internal investigations revealed its trading platform executed all orders accurately and the Coinbase team shouldn’t have taken responsibility to reimburse users.

While the numbers remain undisclosed, Adamant Research editor-in-chief Tuur Demeester revealed that around $1 million will be reimbursed with company funds and expressed his concern over the negative precedent the reimbursement has established for the company and the market.

Ari Paul, the portfolio manager for the University of Chicago’s $7.5 billion endowment, added:

“Coinbase’s decision to refund customers will lead to substantially more money sitting in exchange. Increases risk of Gox type problem. Coinbase as a business has a right to maximize for themselves, but bad for ecosystem by reducing perceived exchange risk. With that said, hard not to respect the decision (especially its speed) as a commitment by leadership to be in it for long haul.”

Other respected analysts, researchers and developers including E8 Inc CEO and bitcoin developer Andrew DeSantis agreed with the analysis of Paul.

Featured image from Shutterstock.

Show comments