One of the main reasons for the collapse in the price of bitcoin on March 12-13 was the mass liquidation of positions opened with large leverage. This was stated in the report of the largest US cryptocurrency company Coinbase.
Key insights into crypto markets and Bitcoin’s value proposition in this special edition of Around the Block://t.co/gwqQ5BfMLZ
— Coinbase (@coinbase) March 30, 2020
“In the context of bitcoin, the reasons are the same as in traditional markets. The reasons behind the Bitcoin crash were similar. Some short term speculators sold, some institutions required cash for margin calls elsewhere, and some leveraged positions were forced to close. But it dropped harder and faster for Bitcoin than traditional markets for one central reason: the size and scope of leverage in the Bitcoin industry, ” the company’s blog says.
According to experts, in traditional markets, available leverage is often limited to 2-3x. In the crypto industry, the situation is completely different.
“Traditional equities markets limit the amount of leverage to ~2–3x. In contrast, Bitcoin has some offshore exchanges that offer 100x+ leverage, where $1 of Bitcoin could be used as collateral to back $100 in purchasing power. To be fair, this is very risky — a position leveraged to 100x would get force-closed if the market moved just ~1% against you. So most traders hold positions at a more sensible 5–30x leverage, but still notably higher than 2–3x,” explained Coinbase representatives.
The company noted that miners receiving loans secured by cryptocurrency could also exert significant pressure on the market, as well as futures trading participants.
“Prior to the crash, the aggregate size of all leveraged contracts on exchange-based products hovered around $4B. Significant enough that any appreciable drop could induce additional shocks to the price. Normally these drops coincide with willing buyers, but the March 12th panic flipped buyers into sellers. As prices drove lower, more leveraged positions were forced to close. Each new sell was met with tepid buying, dragging the price again lower, resulting in more liquidations. A cascading effect.” shared the analysts.
According to analysts, the wave of “cascading liquidations” was most clearly expressed on the BitMEX derivatives exchange, where many people trade with very large leverage.
“Cascading liquidations were most prominent on BitMEX, which offers highly leveraged products. Amidst the selloff, a Bitcoin on BitMEX was trading well below that of other exchanges. It wasn’t until BitMEX went down for maintenance at peak volatility (citing a DDoS attack) that the cascading liquidations were paused, and the price promptly rebounded.” shared market researchers.
The chart below shows:
- price discrepancies between BitMEX and Coinbase during auto-de-positioning of positions;
- fast recovery of BTC price amid BitMEX going offline;
- narrowing the difference in BTC prices for BitMEX and Coinbase.
Coinbase expects that as the industry grows and becomes more regulated, “market dynamics will improve” and such situations will happen much less frequently.
Also, representatives of the exchange noticed on March 12-13 a significant increase in various indicators, for example:
– a fivefold increase in the influx of deposits in fiat and crypto-assets;
– a twofold increase in the number of new users registrations;
– sixfold increase in trading volume.
According to analysts, 67% of users of the American exchange bought against the backdrop of a sharp collapse, preferring mainly bitcoin. Some investors acquired Ethereum and the Ripple XRP token.