Understanding Coinbase/GDAX ETH crash and how to protect your investments

GDAX the exchange from Coinbase company has recently executed all the buy orders all over to almost 10 cents.

<p dir="auto"><img src="https://images.hive.blog/768x0/https://steemitimages.com/DQmVmN2J2f6rJyv4cuuV7jV9WDJovmKboutXDxkxgTx7gcR/flash%20crash.png" alt="flash crash.png" srcset="https://images.hive.blog/768x0/https://steemitimages.com/DQmVmN2J2f6rJyv4cuuV7jV9WDJovmKboutXDxkxgTx7gcR/flash%20crash.png 1x, https://images.hive.blog/1536x0/https://steemitimages.com/DQmVmN2J2f6rJyv4cuuV7jV9WDJovmKboutXDxkxgTx7gcR/flash%20crash.png 2x" /> <p dir="auto">All started with a multimillionaire sell that executed orders dropping from $342.02 to $296 what created a chain reaction on the stop-losses positions that in a matter of seconds dropped the price all to almost 10 cents and got recovered seconds after. <p dir="auto">No money got stolen or lost in that wasn't also a bug, but the way it should work. To proceed I will explain a few key points: <ul> <li>How a stop-loss order works <li>What is a circuit-break <li>Why circuit-break doesn't work with cryptocurrencies <li>How GDAX could avoid that problem <p dir="auto"><em>Disclaimer, I'm not a professional trader and this is not a trade advice post. <h2>How a stop-loss order works <div class="pull-right"><span> <img src="https://images.hive.blog/768x0/https://steemitimages.com/DQmcF3hEXu1qWXaQe4MzxwVRM8LqKeEEfo3GhjpHfw9XWbk/%242700.00%20%C2%B7%20BTC%20to%20USD%20Bitcoin%20Exchange%20%7C%20Ethereum%20Exchange%20%7C%20Litecoin%20Exchange%20%7C%20GDAX%202017-06-22%2023-31-56.png" srcset="https://images.hive.blog/768x0/https://steemitimages.com/DQmcF3hEXu1qWXaQe4MzxwVRM8LqKeEEfo3GhjpHfw9XWbk/%242700.00%20%C2%B7%20BTC%20to%20USD%20Bitcoin%20Exchange%20%7C%20Ethereum%20Exchange%20%7C%20Litecoin%20Exchange%20%7C%20GDAX%202017-06-22%2023-31-56.png 1x, https://images.hive.blog/1536x0/https://steemitimages.com/DQmcF3hEXu1qWXaQe4MzxwVRM8LqKeEEfo3GhjpHfw9XWbk/%242700.00%20%C2%B7%20BTC%20to%20USD%20Bitcoin%20Exchange%20%7C%20Ethereum%20Exchange%20%7C%20Litecoin%20Exchange%20%7C%20GDAX%202017-06-22%2023-31-56.png 2x" /> Many exchanges have an option to set a stop-loss order, that you can define a value that when the market hit that value, the exchange will automatically add sell orders on the market bid price, executing the next available buy order. <br /><br /> As you can see in the image on the left when the market hit the <strong>limit price the <strong>amount will be traded until it's all converted or the market goes above the sell limit. <h2>What is a circuit-break <p dir="auto">In the regular stock market, when a chain reaction happens and the percentage wise change is too high, it will trigger a <strong>circuit-break and shut down all the transactions for a period of time, adding time to people think and do not panic react to the situation. <p dir="auto">A good example is that a few weeks ago Brazilians had a circuit-break when after an investigation went public that potentially could impeach the president, too many USD orders started to be executed dropping the value of the BRL with the uncertain future panic. This circuit-break hold the transactions for an entire day and after the panic pass, they resume the operations with a lower volume being traded and stopping the devaluation of BRL related to USD. <a href="https://www.forbes.com/sites/shannonsims/2017/05/18/investors-brace-for-circuit-breaking-day-for-brazilian-markets/#442fbe5475a2" target="_blank" rel="nofollow noreferrer noopener" title="This link will take you away from hive.blog" class="external_link">More details. <h2>Why circuit-break doesn't work with cryptocurrencies <p dir="auto">Most of the assets exchanges are centralized. Fox example, US companies stocks have their US exchanges to trade it, when the company has stocks in another country the trades must happen in that country exchange. So a circuit-break make sense in those markets. When they're activated nobody can trade. <p dir="auto">That is not possible with cryptocurrencies or assets based on public blockchains. Imagine the situation where GDAX implement a circuit-break and there is a crash on the Etherium, where it is losing huge amounts the value over all exchanges, that would trigger a "circuit-break" in GDAX, but potentially would not in the other exchanges. <p dir="auto">In a situation like that, who is trading at GDAX would have an exchange disadvantage, since they're locked and can't liquidate their assets, and they will keep looking it lose value until the "circuit-break" is disabled where people in other markets can freely trade their undervalued assets. <p dir="auto">"With great powers, comes great responsibilities". <p dir="auto">This problem was a human mistake and if the people had a better understanding of the tools they use that problem would not happen. What that leads to my next topic. <h2>How GDAX could avoid that problem <div class="pull-right"><span> <img src="https://images.hive.blog/768x0/https://steemitimages.com/DQmUJEmoDF6quyyAt1QwgTfCkQw2Bykf4Z7qkWNyde4wtwe/%242713.64%20%C2%B7%20BTC%20to%20USD%20Bitcoin%20Exchange%20%7C%20Ethereum%20Exchange%20%7C%20Litecoin%20Exchange%20%7C%20GDAX%202017-06-23%2000-15-13.png" srcset="https://images.hive.blog/768x0/https://steemitimages.com/DQmUJEmoDF6quyyAt1QwgTfCkQw2Bykf4Z7qkWNyde4wtwe/%242713.64%20%C2%B7%20BTC%20to%20USD%20Bitcoin%20Exchange%20%7C%20Ethereum%20Exchange%20%7C%20Litecoin%20Exchange%20%7C%20GDAX%202017-06-23%2000-15-13.png 1x, https://images.hive.blog/1536x0/https://steemitimages.com/DQmUJEmoDF6quyyAt1QwgTfCkQw2Bykf4Z7qkWNyde4wtwe/%242713.64%20%C2%B7%20BTC%20to%20USD%20Bitcoin%20Exchange%20%7C%20Ethereum%20Exchange%20%7C%20Litecoin%20Exchange%20%7C%20GDAX%202017-06-23%2000-15-13.png 2x" /> Look again at the user interface provided by GDAX to set stop-limit, it looks very simple to use, but it hides a trap, the trap that leads to chain reaction we saw yesterday. <br /><br /> The <strong>Advanced option hidden by default allows the trader to set where he wants to stop trading. However, if the user doesn't set that option, the limit will be <strong>0 what can lead to a chain reaction like that. <br /><br /> GDAX not should only always display that option, but also warn the users that a zero value in that field can lead to unpredictable consequences. <h2>Conclusion <p dir="auto">GDAX is a new exchange and with Coinbase introduces all their users to advanced trading tools without any tutorial or deep explanations of how each tool in the exchange works. <p dir="auto">They failed to provide a good users experience and induced their amateur traders to do a very dangerous operation while in their minds they thought the limit-sell would protect their funds. <p dir="auto">The tools worked as correctly as expected, there are no ways to revert the losses for who fall in that trap and many people probably profited from those poor traders. <hr /> <p dir="auto">If you liked this post, please upvote, I will be happy to help you further.<br /> If you are not a Steem user and my post save you some crypto losses, you can donate to me. <p dir="auto"><center><br /> <strong>Bicoin<br /> <img src="https://images.hive.blog/768x0/https://steemitimages.com/DQmYQdUJNVB3MC8PmFBNattmvUpV7WyHSUJgjWCPF2gZnLU/image.png" alt="Bitcoin" srcset="https://images.hive.blog/768x0/https://steemitimages.com/DQmYQdUJNVB3MC8PmFBNattmvUpV7WyHSUJgjWCPF2gZnLU/image.png 1x, https://images.hive.blog/1536x0/https://steemitimages.com/DQmYQdUJNVB3MC8PmFBNattmvUpV7WyHSUJgjWCPF2gZnLU/image.png 2x" /><br /> <code>1DhWEwa3YhXC8JbbZjwpxiZKqb9dfYRAyY <hr /> <p dir="auto"><strong>Ethereum<br /> <img src="https://images.hive.blog/768x0/https://steemitimages.com/DQmWubdJCaV2awAHs56iTby5WtzPKHsaRadypnmXHdySHTi/MyEtherWallet%3A%20Open-Source%20%26%20Client-Side%20Ether%20Wallet%202017-06-23%2000-44-58.png" alt="Ethereum" srcset="https://images.hive.blog/768x0/https://steemitimages.com/DQmWubdJCaV2awAHs56iTby5WtzPKHsaRadypnmXHdySHTi/MyEtherWallet%3A%20Open-Source%20%26%20Client-Side%20Ether%20Wallet%202017-06-23%2000-44-58.png 1x, https://images.hive.blog/1536x0/https://steemitimages.com/DQmWubdJCaV2awAHs56iTby5WtzPKHsaRadypnmXHdySHTi/MyEtherWallet%3A%20Open-Source%20%26%20Client-Side%20Ether%20Wallet%202017-06-23%2000-44-58.png 2x" /><br /> <code>0xe05342A02D8F6708cd007a9E7a722ef8427cb640<br />