Bitcoin: Why The ‘Flippening’ Failed – Seeking Alpha

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Bitcoin (Pending:COIN) is the first cryptocurrency, but it isn't necessarily the "best". In fact, multiple digital assets have staked their entire value proposition on providing slight improvements on the core technology Bitcoin is based on. This suggests a great deal of Bitcoin's value seems to come from name recognition and other first-mover advantages.

The fact that Bitcoin isn't necessarily superior to the alternatives like Ethereum, Ripple, and even Litecoin hasn't escaped the attention of holders of those competing assets. Many feel that as soon as Bitcoin is dethroned - through another cryptocurrency (Ethereum) surpassing it in market cap - it will lose its premium status and investors will flock to the new coin, dramatically increasing the value of the new coin through an event that has been humorously dubbed "The Flippening"

However, the Flippening is starting to look like a "Floppening". And this key bullish argument for Ethereum is not playing out as expected. While many Ethereum bulls may have rejoiced at Bitcoin's scaling issues and political squabbling over a solution to them - most probably didn't expect Ethereum to run into similar issues a few weeks later. Massive fundraising events called initial coin offerings have revealed serious weaknesses in the Ethereum network, causing many to question how much "better" it really is than Bitcoin.

Status, a project that raised hundreds of millions within a day, appears to be the straw that broke Ethereum's back - at least temporarily. The event was a mess, and it seemed to have set off a chain reaction of dysfunction throughout the entire network, culminating in a flash crash that caused many U.S investors to accidentally sell (through limit orders) their positions at ridiculous prices only to see the price of Ethereum soar back up again. The dysfunction in the Ethereum markets has been so severe that investors, especially on Reddit and other message boards, are suggesting market manipulation may be involved.

One theory suggests the June 21st flash crash was caused by a large holder termed a "whale" purposely dumping an astronomical amount of Ethereum on a single exchange to fill all the buy orders, liquidate leveraged longs, and drive the price extremely low in order to buy up as much Ethereum as possible at extremely low prices before it soared back up. Some Redditors even suggest that this "whale" could have been the recipient of recent ICO funds. To investors used to the highly regulated U.S markets, such a story sounds widely implausible. But in the wild-west of cryptocurrency, an unregulated asset class at the frontiers of finance, it actually makes sense to many people. GDAX, the exchange where the problem took place, is investigating the situation and has provided a response to the community's suspicions by stating, quote:

On 21 June 2017 at 12:30 pm PT, a multimillion dollar market sell was placed on the GDAX ETH-USD order book. This resulted in orders being filled from $317.81 to $224.48, translating into a book slippage of 29.4%. This slippage started a cascade of approximately 800 stop-loss orders and margin funding liquidations, causing ETH to temporarily trade as low as $0.10.

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.

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). Honoring properly executed orders is critical to maintaining the integrity of an exchange.

In response to the large price movement, we decided to temporarily halt trading of ETH-USD. Once we confirmed all systems were operating correctly, we restored trading when in accordance with our Downtime Process (Section 5).

So far, the exchange has found no evidence of wrongdoing. But this event caused many investors, who had made incredible profits through leveraged Ethereum trading, to instantly liquidate their margined positions and those with sell orders to sell at prices as low as $10 for an asset that is currently worth above $300. On the flip side, investors who were lucky enough to have open buy orders were able to earn unbelievable profits by accidentally buying a $300 asset for $10. This sort of extreme activity is sure to attract unwanted regulatory attention. But the dysfunction seems to be concentrated in Coinbase and GDAX - two affiliated companies - and should not be seen as an indictment against Ethereum or cryptocurrency as an asset class.

Conclusion

Ethereum is suffering from currency-specific challenges that put hopes for the flippening at bay. The Bitcoin/Ethereum currency pair has moved in favor of Bitcoin and the Ethereum/USD pair is still reeling from the shock of a massive flash crash on a major exchange. Nevertheless, the bullish case for Ethereum remains strong, and the cryptocurrency is still healthy in regions outside the U.S. One of the key benefits of cryptocurrency is decentralization. Thankfully, for longs, these negative events were quarantined to a few exchanges and couldn't spill into the entire market.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Bitcoin: Why The 'Flippening' Failed - Seeking Alpha