Ethereum Crash

/Ethereum Crash

Ethereum Crash 2018-02-17T21:33:00+00:00

Are we going to witness an Ethereum Crash?

It’s no secret that the Ethereum cryptocurrency value has an uptrend that sees it become most investor’s favorite blockchain platform.

And naturally, ether (ETH), commands a massive interest from the corporate world as well as ordinary people who are out to make some quick bucks from the colossal ROI that Ethereum promises.

In addition, the number of ICOs that have come up on Ethereum’s blockchain has ensured that the price of this crypto has risen again, even when it fell to all-time lows earlier in 2017.

That aside, there have been mini-crashes before, like the one that scared investors on 27th June 2017.

But the question on most skeptics’ mind is whether Ethereum is going to survive the next crash, or the bubble will finally burst. In short, are we primed to witness an Ethereum crash today? Will it be tomorrow? Or is it going to happen in 2019?

Many investors, including some big shot companies, have chosen to go short on bitcoin and long on Ethereum. The reasoning is that even if it were to happen, Ethereum’s blockchain system, revamped recently by adopting a PoS application could wither another crash. That is what the optimist says.

However, let us be pragmatic and examine the possibility of the fact that we could have Ethereum crash due to a network failure, government interference, issues related to trading failure or a domino effect from other spectacular crashes that could happen with any of the other cryptocurrencies.

Will Ethereum crash due to technical issues?

It is profoundly unfathomable, but trends around the world indicate that it is a possibility.

We should be aware that a purely technical failure could affect Ethereum’s transactions triggering a downward trend that would affect prices, leading to panic sells and plundering Ether prices to the floor.

If that happens, will the cost of Ether rise again?  Let’s examine six such technical possibilities.

Can a network failure crash Ethereum?

Powerful states like China, control a majority stake in the mining network. If China’s ban on cryptocurrencies in general and mining in particular, cuts off the rest of the world, then it is nominal to say that a crash could happen. How? Look at these examples:

  • Mining may become unprofitable for the ‘validators’ considerably affecting the blockchain transactions.
  • Prolonged immutability could spell danger for the cryptocurrency.
  • ‘Validators’ refuse to finalize blocks due to a ‘liveness denial’
  • If a finality reversion occurs, the network could see the creation of two similar blocks in the chain and states can use that to shut down the system.
  • If Ethereum’s master node had any loopholes, it would be difficult to contain an eventual collapse of the blockchain.

Could a stabilized network lead to a crash?

What if the Ethereum network stabilized and led to diminished returns? This possibility is a question industry players have considered for a while.

  • At the moment, Ethereum uses the proof of work validation of transactions to reward miners.
  • If the network were to stabilize so that mining becomes unattractive, the value of ether would fall.
  • Mining then would become unprofitable, and by extension, trading in ether would fall.
  • However, Ethereum has what it calls Casper implementation that would see PoW replaced by PoS(Proof of Stake).
  • This will likely reduce power consumption by a significant margin and prevent an escalation in mining equipment prices.

So, this factor is unlikely to see Ethereum crashing short term.

The PoS has several advantages over PoW like:

  • increased security,
  • high energy efficiency
  • and a reduction in the risks associated with centralization.

This is why the Ethereum blockchain is popular, according to many investors.

Will quantum computers pose a threat to the Ethereum blockchain?

Quantum computing has not fully developed. Such computers will have speeds higher than 100 million times the current processors.

  • Ethereum, like other blockchains, relies on transactions encrypted by a public key and a private key.
  • It is currently not easy to locate information about the keys, making Ethereum transactions secure.
  • However, indicators from the research going on are that such a computer would have the capability to decipher blockchain public key information and pose a greater risk to cryptography.
  • So, it is entirely possible that when quantum computers do finally arrive, we could see blockchain security rendered ineffective and obsolete.
  • If such were to happen, sellers and buyers would run the risk of losing their crypto.

Nevertheless, investing in Ethereum will not see a downtrend due to this fact because quantum computing is still a long shot away. Quantum resistant security measures are being developed to guard against this existential threat.

Can a soft fork (FUD) necessitate an Ethereum crash?

Blockchains experience soft forks when there is a change in software protocol that means new nodes invalidate old transactions or blocks.

It can also occur when there is a temporary divergence taking place where miners who use nodes that aren’t upgraded violate new rules because their nodes do not have the current information.

Could this be the reason why prices are falling? I think so.

What scenarios can necessitate an Ethereum crash in case of a soft fork? Let’s have a look:

  • Because a soft fork operates in a backward compatible model, it is likely to expose the Ethereum network protocol during the altering process.
  • When upgraded nodes choose to reject transactions from non-upgraded ones, there is a risk that it can be detrimental to the network.
  • Widespread issues could see panic and prices going down.
  • A soft fork can accentuate security threats to the system because it requires a majority of the miners to proceed.
  • If a soft fork occurs and more miners refuse to accept it, the blockchain could be weakened.
  • This could affect transactions and primarily when ether rates go down, the value of Ethereum also falls.
  • Soft forks can end up into splinters throwing the network into some disarray.

Is a hard fork the reason why Ethereum crashed in 2017?

When it comes to cryptocurrencies, a hard fork is a scenario where the blockchain splits into two different versions; an old one that fails to upgrade and a new one that upgrades.

Will the hard fork (FUD) lead to Ethereum crash? Is it possible that this is why cryptocurrency is not for mainstream or the future? Let’s check a few scenarios.

  • A hard fork could result in the formation of two splinter chains that can compromise security, lead to confusion and result in consumer panic.
  • After DAO was hacked, the resultant hard fork led to the formation of two splinter groups: one split named Ethereum Classic
  • Ethereum has what we can call ‘home-made’ hard forks that act against transactions settlement.
  • This event has undermined the blockchain’s credibility, and investors may not want to go long on it.
  • Hard forks have risks that can affect trading on exchanges and if mitigating factors do not counter such, then rippling effects could see prices falling.
  • Long term, hard forks pose a risk to the Ethereum blockchain by being a possible basis for court cases. A nasty one could see Ether lose considerably and crash.
  • Hard forks affect scalability as they lead to risky scenarios where there could be vested interests when security and stability concerns occur.

Could we see Hackers with bots create a blockchain failure?

While blockchain is touted as the future of transactions, it is apparent that it is not yet secure enough from threats by bugs and hackers.

It is precisely with hacking that Ethereum faces the most significant risk to fading.

  • Hackers have motivation beyond just gaining access; some want to disrupt and cause chaos.
  • If a broader attack than the $50m DAO heist were to occur, then it would be bad news for investors. Already, investors engage in margin trading whenever there are slight downturns in Ether value.
  • It is such setbacks that will affect the Ethereum blockchain if its open source platform were to be breached.

Other scenarios of breach could be as follows:

  • Hackers access the system and transfer all ether or disrupt transactions by invalidating them.
  • Hacker gurus can hitch-hike on the mining processes and form parallel transactions that would see market caps overridden flooding the blockchain.
  • Quantum computing gives hackers power to attack any software systems that encrypt the smart contracts. Such control would make any software vulnerable.

Forking and protocol upgrading can be manipulated by hackers to cause prices to peak and if Ethereum does, it would surely be a matter of time before the bubble bursts.

 Can Ethereum crash due to Trading Bots?

Can Ethereum bots be responsible for a crash? Malicious traders and institutions can interfere with trading bots to the effect that they become disruptive to the price and value of Ethereum.

  • These malware bots can create illusions that will make ordinary and unsuspecting traders believe that prices are going down and therefore engage in panic sales.
  • By manipulating the market trends, bots can lead to a volatility that Ethereum may not recover.
  • Those who are short will be highly motivated to sell their ether at throwaway prices. Those who were long would likely wait for the market to stabilize. However, large-scale disruptions could have serious ramifications.
  • Sometimes bots have been programmed to create and execute orders between themselves, cutting off of other users.
  • This manipulation can be risky to a cryptocurrency like Ethereum.

Ethereum Trading Bots can lead to an unintentional crash.

Just like on the stock exchanges, Ethereum can be traded using bots. Ethereum bots let you monitor trading without having to attend to it physically. They are pretty good at their work.

However, it is possible for an unintentional bot malfunction to occur.

  • It can lead to unprecedented volatility and create artificial pump and dump scenarios. This can lead to trading sell-offs which are recipes for mini-crashes.
  • What’s reassuring is that unintentional bots won’t lead to flash crashes as they would have to conform to the peer/consensus algorithms.
  • In most cases, unintentional trading bots do not affect market capitalization, and prices usually recover after a short while.
  • This scenario alone cannot make Ethereum crash.

Will Big Players Dump Big Amounts into the market and crash it?

A crash can be initiated by a pump and dump scheme that is played out on a large scale. To pump and dump means powerful (not entirely always) buy the crypto at very low prices and then raise a buzz about it to increase the market cap.

  • Unsuspecting traders or those who do not keenly follow market charts and historical data will panic.
  • They are duped into thinking that the market prices are falling and begin to dispose of their ether in a bid to save.
  • This will dump volumes of cryptocurrency and so sending the value to the floor.
  • Malicious competitors and others with vested interests could use this to bring Ethereum down.

It is advisable for traders to watch market capitalization charts and use insider trading channels to monitor movements; otherwise, the pump and dump is a threat to any crypto investor. 

Will Trader- Miner Cooperation lead to a crash?

There is a possibility that we could see an attempt at cooperation between traders and miners. This can also be the reason why prices are falling.

Were this to happen, Ethereum prices would face speculative volatility and cause cases of sell-offs or pump and dump.

  • Another level of cooperation is between exchange sites and traders. Such sites can allow traders to borrow heavily and engage in trading.
  • For instance, Coinbase is under investigation for its alleged role in the flash crash Ethereum faced in 2017. On that occasion, ETH dropped instantly in value from $317.81 to 10c.
  • Although it recovered faster, this precipitous fall was a sign that such cases pose a threat to Ethereum’s stability and raise questions about its future.

What is a Speculative Bubble Burst?

A bubble occurs when prices are exaggerated to a point they do not reflect the true value of an asset.

  • During this spike in the hype, a horde of investors pour into the market and invest heavily with the hope of massive cash out.
  • However, when the pricing peaks after most investors have put in their money, demand will drop alongside the price. Sellers go into a panic.
  • They then sell off their ether for instance in anticipation of a further drop.
  • Ethereum is steadily gaining price and it can overtake bitcoin.
  • It is being hyped as the next big thing.
  • If this goes on and people dump their BTC or Zcash for Ethereum, the only question would be whether we would have to wait long before the bubble bursts.

Is a Short Squeeze Aftermath bad news?

A short squeeze occurs when there is a sudden rise in price. It forces the majority of the short traders to close or exit.

  • This has effect when traders borrow from other accounts to sell at the high price hoping to replace when the prices go down.
  • Short selling can result in massive borrowing and disturb the market.
  • What is happening now with Ethereum is perfect ground for a short squeeze.
  • Should that happen on a large scale, things could go south?

Long-Squeeze

If Ethereum investors start buying ETH heavily in the hope that the price will keep rising and that they will sell at a premium in the future, they will go long.

  • However, if prices plummet suddenly, long-term investors will decide to dispose of their shares to avoid further loses.
  • Though highly unlikely, it could be one of those rare things to cause Ethereum to crash.

Major Crashes on Exchanges in the Past

Classic cases of crashes have recorded in the past. There are several documented examples of how panic and distortion brought down promising investments and markets.

Cryptocurrency relies on exchanges and if some crash, then the impact will be far-reaching.

Below are examples of stock market crashes and failures.

  • In 1637, the Dutch experienced the Tulip crash that saw massive losses after the bubble burst.
  • In 1711-1720, the UK experienced the South sea bubble where stock value dropped from 1000 pounds to practically zero.
  • 2000-2002, the dotcom crash that affected the Silicon Valley and saw a major collapse as the internet craze burst spectacularly.
  • In 2015-16, the Chinese stock market experienced a significant crash leading to a global financial meltdown.

Five General Ethereum Crashes in the Past

If it happens, it will not be the first time it does.

  • In June 2017, the price of Ether dropped by more than 25% as price chart experts warned that Ethereum was facing a crash.
  • In June 2017, ETH crashed in a plunge from $300 to about $0.10 leading to margin trading with several cases of stop-loss calls leading to massive losses. This is one of the major flash crash occurrences in Ethereum.
  • On July 14, 2017, Ethereum experienced a crash in its prices by 15% as reports of a glitch surfaced. It was a little too volatile at the time.
  • The hard fork that followed the DAO hacking in 2017 saw Ethereum price value drop by over 50% amid uncertainty about its future.
  • In September 2017, Ethereum lost value as news of events in South Korea affected market value in cryptocurrency.

Will Ethereum crash again? We are observing the charts.

Five Scenarios of Trading Exchange Fraud and Intentional Crashes

There is a possibility that insider trading information can be used to cause market crashes. We have a few prominent examples here.

  • It is such threats that Ethereum must grapple with. Can it happen to Ethereum or one of the major blockchain giants?
  • In January 2008, Jerome Kerviel was accused of intentionally and fraudulently aiding in the loss of $4.9billion from Societe Generale bank.
  • In May 2010, a British man named Sarao Singh fraudulently led to the Wall Street flash crash that lost $500billion
  • In Dec 2017, Bitfinex, a leading crypto exchange stated that it was facing intentional DDoS (denial of service). Several ICOs on the exchange lost millions in cryptocurrency.
  • HSBC benefited from collusion between several traders who undercut the exchange price rates of Sterling pounds. HSBC racked in $162,000.
  • Citi group had insider information passed to buyers about a fix to push an anticipated euro/dollar rate. In the end, the group made over $ 99,000 in marginal profit.

Can China’s Ban on cryptocurrency and ICOs lead Ethereum to crash?

The Chinese government’s total ban on all ICO activities in the country is not only bad for crypto startups; it spells danger for Ethereum which draws much of its value from being the platform on which several developers launch decentralized apps.

  • What this means is that should China-based investors abandon the idea of funding and investing in ICOs, Ethereum could end up losing value as a result of its reduced demand.
  • If China and other East Asia countries enforce this ban, in the long term, Ethereum could see a significant drop in prices going down.
  • The above scenario would be played out similarly if the US, for instance, banned Ethereum.
  • There are fears within certain quarters that this is already happening with talk of stricter ICO regulations.

Sudden Tax Regulation

If world governments introduced swift tax measures, it is possible various cryptocurrencies that run on Ethereum open source platform would face scrutiny.

If it turns out this way, the view that cryptocurrencies are unregulated will change. As such, third party interference spells danger for Ethereum.

Are Enforced Monopoly strategies

If the world governments pulled resources to track Ethereum and transactions on its blockchain, chances are it will reduce public investment interests. The same would be possible if a tiny group of individuals had the right to conduct services on behalf of blockchain technologies.

The value of Ethereum, like with other cryptocurrency lies in the belief that it cannot be regulated and it remains anonymous. Granting monopoly to a few individuals is akin to allowing monitoring which could kill start-ups that benefit from ‘darknet’ technologies.

However, this has not happened yet, and Ethereum will continue to soar.

Five Scenarios of Ether Value Decreasing Due to Taxation

Taxation Likely scenario and effect
Capital gains tax Ethereum could be affected by capital gains tax if it were to list on the Futures market.

The volatility of the crypto combined with other market factors could see value slide drastically.

Property tax If Ether is taken to be property and therefore taxed, the short-term investment would be unprofitable.

Many would the go long; insider trading trends indicate many investors prefer this.

But tax will make it less attractive taking away the hype.

VAT and Sales Tax Adding VAT to property taxes on all cryptocurrency including Ethereum would be bad for traders.

Mining will be unprofitable if its taxed and trading could see a drop in activity as traders keep off.

Trading Tax Proposed taxation but could be a long way off.

Ethereum isn’t regulated and therefore tricky to enforce taxation rules.

Other taxes that could apply to ETH are income tax and sales tax.

10 Possibilities of Ethereum Losing Value

Apart from the scenarios highlighted above, it is not asking too much to say that there is a plethora of events and sub-events that can see Ethereum lose value. Let’s examine some.

  • Unprecedented criminal activity at the blockchain could see big investors close shop and lead to prices plummeting
  • Other cryptocurrency crashes can have a domino effect, swallowing Ethereum in the process. For instance, if bitcoin is a bubble and it bursts, investors would question Ethereum’s viability too.
  • Can a continental power outage be the end-game for Ethereum? It is possible as mining of Ether would be severely undermined if computing failed across the world. Transactions would collapse; ETH would lose value and ‘puff!’
  • Large-scale governmental interference like in the case of Russia and China.
  • Governments are increasingly exploring ways of regulating the cryptocurrency platforms.
  • One way would be to engineer the creation of a new crypto that could be used to disrupt and eventually cripple Ethereum.
  • Banning mining and trading exchanges is another event that could be a long-term threat to Ethereum and the ICOs that run on its open-source platform.

Could North Korea initiate a massive Ethereum Hack?

  • North Korea can sanction a major hacking.
  • The country, however, would need to rely on the input of other states with similar ambitions, making the likelihood of an occurrence a long shot.
  • An international crackdown could be possible.
  • The primary concern is the development of blockchain technology that is helping dark markets and criminals to pose threats.
  • Most of the start-ups on Ethereum that specialize in privacy could fall and affect ETH. If this happens, will Ether trading value rise again?
  • Sustained hacking on Ethereum

Ethereum has had to weather some steady hacking and hacking attempts. While robust security systems have thwarted most, there are examples of successful ones like:

  • On July 29, 2017, $30 million in ETH value was stolen from Ethereum wallets that had a bug.
  • DAO faced a major hack losing value and affecting Ethereum prices.
  • July 17, 2017, Coindesk lost $7.4 of ether coins to hackers
  • A group calling itself White Hat is said to have rescued $208m from vulnerable accounts.

It is possible cryptocurrency will suffer the fate of the dot.com fad.

  • Experts and analysts opine that Ethereum and other cryptocurrency blockchains could suffer psychological deaths.
  • The crypto may not survive political intrigues and bureaucracy.

Although there are limits in place, it is not too hypothetical to say that shortly, mining would be simplified by supercomputers like quantum technology.

  • An occurrence would see Ethereum mining become easy and market caps would fall.
  • This would affect Ethereum’s scalability and see a reduction in value.

The Conclusion

Ethereum at the moment does not seem to have a more significant risk of fading. However, events elsewhere can precipitate a ripple effect that would see it go down. The adaptability and flexibility of its decentralized platform are in the short term great for security.

Nevertheless, going into the future, even the proof-of-work validation system may have to negotiate tricky security terrain to avoid being sucked into possible bubble bursts.

In the meantime, trading data and stats suggest that Ethereum is one perfect investment opportunity. Go ahead and make a fortune, but be careful of the market.

We will continue to bring you insightful news about the crypto world. Be sure to check us out regularly to learn more about Ethereum.