How to maintain the emerging market structure of digital currency under the market waterfall
Editor's Note: This article comes fromCrypto Valley Live (ID: cryptovalley), Author: Coin Metrics, translation: Ziming, reprinted by Odaily with authorization.
Editor's Note: This article comes from
Crypto Valley Live (ID: cryptovalley)
, Author: Coin Metrics, translation: Ziming, reprinted by Odaily with authorization.
The digital currency market is still nascent, and what we are currently experiencing is the steepest downturn since the collapse of MtGox six years ago. But since then, many new exchanges have sprung up, derivatives have appeared in the market, and the amount of money flowing into digital asset trading has skyrocketed.
In this article, we examine how the market has withstood the pressure of the recent sell-off, and whether the unique market structure of digital currencies exacerbated this market downturn.
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BitMEX liquidation spiral
Coin Metrics’ real-time reference rate recorded two large BTC price moves on March 12 and 13:
On March 12, between 10:00 and 11:00 UTC, the price of BTC dropped from $7,300 to a low of $5,690.
From 11:00 PM on March 12 to 2:15 AM on March 13, the price of BTC dropped from $5,800 to a low of $3,900.
One of the exchanges played a particularly important role during the second price drop: BitMEX.
BitMEX is one of the largest new derivatives markets to emerge after MtGox. It created the “Perpetual inverse swap,” a leveraged financial product that allows dollar-denominated BTC perpetual futures contracts using BTC as margin collateral.
BitMEX has received widespread attention since its establishment in 2014. As of March 2020, it is trading in the billions of dollars per day. Research has shown that the exchange’s perpetual contracts are critical to BTC’s price discovery.
On March 13, at 2:16AM UTC (during the second aforementioned price drop), trading on BitMEX slowed down as the exchange experienced hardware issues. The issue was later determined to be a deliberate DDOS attack that nearly made it impossible for people to trade on BitMEX.
As soon as BitMEX was attacked, BTC price rebounded and surged to $5,300.
The red area indicates that BitMEX suffered a DDOS attack
Long positions worth 1.1 billion contracts (one contract representing a $1 position) were liquidated from March 12 at 9:00 AM UTC to March 13 at 6:00 AM UTC. As more and more traders are liquidated, open interest (the number of contracts a trader still holds) gradually decreases:
BitMEX allows BTC leveraged trading, but also ensures that no trader can lose more than their margin. This is often not possible in traditional markets, and BitMEX uses two features to achieve this.
First, if a position is liquidated (i.e. there is not enough margin left), an automated system (liquidation engine) will take over the position. The system, operated by BitMEX, is designed to close out a trader's position at a price favorable enough that there is no zero remaining margin. If this purpose is achieved, the profits will go to the insurance fund. Otherwise withdraw funds from this insurance fund (over 30k BTC as of writing).
The chaos was only partially contained when BitMEX suffered a DDOS attack. This has led many to wonder whether the exchange's method of handling liquidated positions caused or exacerbated this crashing market.
Here's what they think:
When a long position is liquidated, as when the price falls, the engine must sell the contract. With more contracts to liquidate and less liquidity in the market, the engine struggles: it has a lot of contracts to sell, but with deteriorating price conditions, more liquidations and more contracts are sold. This can lead to a vicious cycle that is hard to stop.
When it became very difficult to trade on BitMEX due to DDOS attacks, the liquidation engine of BitMEX, the largest seller in the market, failed and the price naturally went up.
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Continuing Impact on Liquidity
A common way to gauge market conditions is to look at the bid-ask spread, which is the difference between the best bid price (that is, what buyers are willing to pay) and the best ask price (that is, the price that sellers want to charge). Usually measured in basis points (0.01% equals 1 basis point or bps).
For BTC, which is still an emerging asset class with fees that vary by venue, bid-ask spreads are mostly below 20 basis points under normal trading conditions. This can be seen on the following three exchanges from the table below from February 1st to 3rd of this year:
Once the large price swings are over and a steady state is achieved, the spread returns to its previous level.
But what actually happened on March 12-13 turned out to be different from expectations, as the spreads still haven't returned to their previous levels.
There could be multiple explanations as to why the spread has not returned to its pre-March 12 levels. Market participants expect volatility to continue and prepare for it by widening spreads. The price range of BTC in the past month has reached a six-year high.
Increase in number of stablecoins
in conclusion
As the impact of COVID-19 on global markets began to be felt (S&P’s all-time high was Feb. 19), Coin Metrics observed an increase in the supply of all stablecoins. And after the sharp drop in BTC, the supply of stablecoins also seems to have increased.
The dual impact of the halving of BTC’s dollar value and the massive issuance of stablecoins has caused the market capitalization of stablecoins as a percentage of BTC to double in recent days:
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in conclusion
This recent market move is staggering and the largest in BTC’s recent history. It has many implications: As people scramble to deposit BTC, spreads in spot and futures markets widen, on-chain fees soar, and stablecoins gain more market share.
