01.08.2021

Why do cryptocurrency exchanges stop working during sharp jumps in the Bitcoin exchange rate?

Over the past week, the price of Bitcoin has reached a new all-time high, surpassing the $ 41,000 mark. It was followed by the largest drop in the history of cryptocurrency in dollar terms: the cryptocurrency fell to 31.7 thousand dollars.

Against the backdrop of these events, trader activity and trading volumes increased significantly on major cryptocurrency exchanges, after which Binance, Coinbase and other platforms faced another series of disruptions. EToro even decided to temporarily increase the minimum deposit for trading accounts to cope with the influx of newbies. But why do exchanges regularly go offline when there are sharp fluctuations in the Bitcoin exchange rate?

To begin with, an explanation: exchanges really constantly go offline when a panic begins in the cryptocurrency market, and coin rates begin to jump sharply. That is, traders simply cannot conduct a deal or cancel an existing order, which causes problems.

Basically, this turns into lost profits, but it can also lead to losses – especially if you do not have time to sell the coin in time and go, for example, to stablecoins. The latter are tied to the exchange rate of dollars and other common currencies, so traders use them to preserve the dollar value of their portfolio and sit out the troubled times. Nevertheless, if during this time the rate of their cryptocurrencies collapses, the dollar equivalent of the funds will be saved. Well, if after that a trading fan still has time to buy the same asset at a reduced price, then he will get a double benefit.

Against the background of the regular problems of exchanges during a sharp change in the market situation, even a popular meme appeared in the community. In particular, the servers of Coinbase and other trading platforms are portrayed like this.

However, because of this, the problem does not become smaller, so it is worth at least to understand its causes.

Why isn’t the cryptocurrency exchange working?

As you know, times of increased volatility – that is, sharp changes in rates – of assets can be the most profitable for traders. It is sometimes possible to buy cheap and sell in such conditions in a matter of minutes. In this regard, during such periods, the “massive fall” of exchanges promises millions of dollars in lost profits. The Block analyst Larry Cermak noted that Coinbase has seen a record surge in user activity over the past few days. Here is a quote from Decrypt.

Coinbase posted a record daily volume of $ 9.56 billion yesterday. Just to illustrate how insane this amount is: this is more than the total trading volume for the first quarter of 2019. Also more than the total for January last year.

That is, the day before, the platform encountered daily activity of traders, which can be compared with the total load indicators for the quarter. Accordingly, the number of operations carried out was really incredible – and the exchange also failed to cope with the load.

The spike in traffic, putting additional stress on the exchange, has clearly caused many major problems in the technical side of customer service. But this is not the first rally in Bitcoin and far from the first sharp increase in trader activity. So why is the problem still there? According to experts, the main problem for crypto exchanges is the unpredictability of Bitcoin. Pocket Network CEO Michael O’Rourke noted that large companies typically struggle to find a balance between current and potential demand for the power of their servers. Here is a quote from him.

Usually it is about the scalability of the infrastructure. It doesn’t make sense for Coinbase to increase its server spending tenfold in anticipation of unknown spikes in demand.

In other words, problems like this are inevitable in the growth and acceptance of a new industry. For the exchanges themselves, it is quite costly to “insure themselves” with additional capacities, since more equipment requires high maintenance costs. And if in any other area companies can predict the expected load and attendance of their resources, then cryptocurrency exchanges are practically powerless in this matter. Nevertheless, coin rates change very sharply, and it is simply impossible to predict such trends.

We believe that the explanation of the problem is quite logical. Additional server capacity is not cheap, so the management of cryptocurrency exchanges are trying to reduce this figure to the required minimum. However, when there is a sharp rise in the market, it takes time for the appropriate reaction, which is why problems arise.

Apparently, it will not work to get rid of this. Yet exchanges are now facing record traffic, which means their costs are also high. I would like to believe that over time, this inconvenience will not be so critical for traders. Perhaps some solution to the problem will still be found.

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