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What Happened On March 12 at #bitmex

The first leg down was most likely caused by traders de-risking as global equity markets were selling off. The second leg down was likely triggered by a lender that was liquidating collateral. The collateral had belonged to borrowers who became insolvent as a result of the first leg down. Some miners shut down their rigs after the first leg down. A lot more did during the second leg down.

And then the market structure broke.

Because BitMEX only accepts BTC as collateral, all the BTC-perp longs on BitMEX are by definition forced to take on leverage. To understand why this is the case, consider this: If a trader goes long BTC-USD using perps on BitMEX, as the value of BTC drops, the trader loses money on the trade, and the value of the BTC collateral decreases. This intrinsically creates risk for liquidity providers on BitMEX. When the market moves more than 30% in a day, even traders with relatively mild amounts of leverage start getting liquidated. Market makers understand this, and thus provide less liquidity than they otherwise would, accelerating the downward cascade.

As spot prices fell as a result of collateral liquidations, derivatives followed. BitMEX started liquidating levered longs. Those liquidations started cascading. Given the magnitude of the first leg down, many market makers simply stopped providing liquidity until the market settled down. With wild spreads—which at times exceeded $500—between BitMEX and Coinbase, liquidity providers did not want to go margin long on BitMEX to try to stop a series of cascading liquidations.

Moreover, the Bitcoin blockchain was congested. This was compounded by the fact that block production slowed as miners turned their machines off. As the prices between exchanges deviated, arbitrageurs literally could not deposit BTC on BitMEX to bring prices in line even if they wanted to try to catch the falling knife.

At one point, there were only ~$20M of bids left on the entire BitMEX order book and over $200M of long positions to liquidate. This means the price of BTC could have briefly crashed to $0 had BitMEX not gone down for “maintenance.” Given BitMEX’s central position in the crypto market structure, this price move could have propagated through to all the other BTC trading venues.

#kryptowaluty #bitcoin #kryptokomedia