Ethereum "flash crash" worried investors on Wednesday’s night

One event this week shows why digital currency markets still have a long way to go before they're safe enough for large-scale trading. The digital currency Ethereum experienced a "flash crash" on Wednesday, with the price falling from about $296 to a low of 10 cents in a matter of minutes.

The most widely-used exchange, Coinbase-owned GDAX, operates like a traditional stock exchange, and lets traders buy stock on margin and place so-called "stop loss" orders—an automated instruction to sell if the price falls below a certain point. Adam White, the vice president of GDAX, wrote in a blog post on the company's site that an unusually large sell order caused the crash.

The size of the order caused the price of the currency, which is already volatile, to dip. Things started to go really haywire, however, as the price dip triggered a series of stop loss orders. In this way the trade went through—even if the price was totally irrational, and driven only by an algorithmic frenzy.

“We are continuing to conduct a thorough investigation and will keep customers updated with any resulting actions. With that in mind, it is important to note that these trades are final in accordance with our GDAX Trading Rules (Section 3.1),” White wrote. “Honoring properly executed orders is critical to maintaining the integrity of an exchange.”

This is only the most recent of a series of similar events across crypto exchanges, and rather than being a reflection on GDAX in particular, it’s a symptom of the underlying problems created by the stress of capital flow increasing faster than market infrastructure development.

Although the price quickly returned back above $300, the millions of dollars that investors lost due to forced selling of their positions will not be recovered. This incident highlights the relative immaturity of the cryptocurrency trading ecosystem, which has been stressed by a 20x increase in daily trading volume since the start of 2017 without any fundamental change in market structures.

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.