On June 21, in the midst of a months-long and incredible rise in value, ethereum, the world's second-largest cryptocurrency according to market cap, fell from $317.81 per token to just 10 cents in mere milliseconds. An article by Bloomberg suggests that the Commodity Futures Trading Commission is investigating the popular digital currency exchange Coinbase about the incident. In the wake of the crash, ethereum recovered its price incredibly quickly. In fact, it climbed by about $300 per token in just a few seconds. What was behind the price plunge? And why might Coinbase know something about it?

Margin Trading May Have Been a Factor

According to a report by Bitcoin.com, the CFTC has concerns that leveraged or margin trading may have caused the quick price drop for ethereum. Margin trading is a popular investment technique allowing investors to borrow money in order to complete a trade. In the aftermath of the crash, Coinbase did away with their margin trading service for cryptocurrencies, and regulators took note.

That Coinbase was singled out for investigation does not necessarily mean that the exchange was directly (or even indirectly) involved in the price crash, nor does it mean that any exchange had control over that crash. However, the timing of the crash relative to the removal of margin trading as an option via Coinbase's interface may have suggested a possible connection to regulators with the CFTC. More generally, though, the agency is giving cryptocurrency exchanges a closer look now than ever before. There are many reasons for this: cryptocurrencies have been proliferating and growing in value at an outlandish rate this year, and some exchanges, including Coinbase, are processing billions of dollars worth of transactions for the year. Still, the industry remains highly unregulated, causing concern about the possibility of fraudulent activity.

Coinbase Releases Statement

Coinbase released a statement regarding the investigation, indicating that the company will fully comply with CFTC requests. The statement suggests that "Coinbase complies with regulations and fully cooperates with regulators. After the GDAX market event in June 2017, we proactively reached out to a number of regulators, including the CFTC. We also decided to credit all customers who were impacted by this event. We are unaware of a formal investigation."

It's possible that the flash crash was precipitated by a single gargantuan trade. A sell order for $12.5 million dollars triggered a number of other auto-trades which investors had pre-set in the Coinbase system. What followed was the nearly-instantaneous crash. In the seconds to follow, a large number of traders placed new orders, prompting the price recovery. The incident may have been caused by margin trading, Coinbase, or some other set of factors which are not known at this point.

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