BitMEX is no longer the dominant force in the Bitcoin futures market. Just a year ago it seemed easy the inconceivable, but rapidly growing volume of institutional money and the emergence of effectively regulated cryptocurrency custodians have caused a big shift in the cryptocurrency market.
The Bitcoin market is mainly divided into three submarkets: spot, options and futures. Spot transactions include fiat - crypto or crypto - crypto transactions without the use of borrowed capital or leverage. Options are a form of derivatives that allow investors to purchase contracts for the purchase of bitcoin at a certain time and at a certain price. Futures contracts allow investors to trade bitcoin with a large share of borrowed capital. For example, at Binance Futures, the maximum leverage level is 125x of the trader’s own capital.
“On paper” the Bitcoin futures market hassignificantly larger volumes than the spot or options market. Trading futures contracts is easier than options, and they allow investors to operate with greater capital in comparison with the spot market.
In the first three months of this year, demand for alternative futures exchanges such as Binance Futures, Bybit, OKEx, Huobi and FTX increased, gradually narrowing the gap between BitMEX and its competitors.
Then, on March 13, the price of bitcoin on major exchanges fell to about $ 3,600. This sharp drop was the beginning to reduce the dominance of BitMEX in the futures market.
The fall in price in mid-March was caused inFirst of all, a cascade of liquidations on BitMEX. The liquidation of a futures position occurs when the price of bitcoin falls or rises below (or above) the price of liquidation of a position. For example, if a trader places a contract to buy bitcoin at a price of $ 9,000 with 25x leverage, then if the price falls below $ 8600, this position will be liquidated.
When on March 12 the price of Bitcoin on BitMEX fell from$ 7,967 to $ 5,800, which provoked a lot of liquidations of long positions that were supposed to happen in a short period of time. The BTC rate continued to fall, the very next day reaching the minimum value from the beginning of the year at $ 3,596.
The sudden drop in BTC, which some call Black Thursday, led to a reduction in BitMEX's market share.
What actually caused BitMEX to lose its dominant status in the Bitcoin futures market
When the price of bitcoin fell from about $ 6,000 toless than $ 4,000, some of the leaders of prominent industry companies, such as FTX CEO Sam Bankman-Fried, have suggested that the liquidation BitMEX engine sold the bitcoin market for about $ 10 million at a time.
To understand the mechanism of liquidation of a position, beforeof all, it is important to correctly understand the role of the futures exchange. A futures exchange is only an intermediary between two types of traders: sellers and buyers. When a trader places a buy order, the task of the exchange is to find another trader selling the asset at the same price so that the transaction takes place.
When a trader takes a long position and makesbet that the price of bitcoin will rise, but the price drops to the level of liquidation, its position is laid out on the market for the purpose of selling, which creates downward pressure on the price. Then the futures exchange must find a buyer who is ready to take on the growing pressure from the sale and buy liquidated contracts.
BitMEX's problem at that time wasthat her order book — an electronic list of buy and sell orders — turned out to be too thin. At the same time, as the price fell at an unprecedented rate to a level unprecedented since 2018, buyers and sellers tried their best to keep up with the falling price - even on the most popular futures exchange.
In the end, liquidated positions weretransferred to the liquidation "engine" BitMEX. He, apparently, began to sell positions in the amount of $ 10 million, increasing the bearish pressure on bitcoin. When the order magazine failed to cope with a series of consecutively placed orders to sell for a total of $ 10 million, BitMEX went offline "for technical reasons." While BitMEX was in maintenance, the cryptocurrency market stabilized and soon the BTC started to recover.
On March 12th, FTX CEO Sam Bankman-Fried said that if BitMEX hadn't gone for maintenance then the price of bitcoin could theoretically drop to zero.
“There is a critical attitude: the amount of liquidation caused by the price movement of 1 dollar / liquidity by 1 dollar. We call this coefficient R. So R that day was very high. There was an endless cascade of liquidations, and the BitMEX order journal was almost completely erased. When the R value rises above 1, we have big problems. Why is this so? Because there is a 10 millionth cascade of liquidations. He moves the price down along the X axis, and that’s enough to ... provoke new liquidations in addition to these 10 million. A positive feedback loop arises, and BitMEX eliminates the order journal up to 0 ”.
The head of OKEx, Jay Hao, also noted that the price of bitcoin could fall to three-digit values if BitMEX did not go to those then. service.
“It was rumored that the decision to close atmaintenance was taken in manual mode in order to stop the BitMEX liquidation mechanism from cascading liquidation of all users against the background of an almost complete lack of liquidity. If BitMEX hadn’t gone offline, liquidations, due to the inverse nature of their futures, could have easily continued, reducing the price to three-digit values. ”
After this controversial sale, the quantityBitcoins held on BitMEX for two weeks decreased by 25%. There can be two reasons for this: either many users withdraw their funds from BitMEX after March 12, or BitMEX reduced the amount of their own risk for Bitcoin.
One way or another, BitMEX lost OKEx titlethe largest futures exchange on the bitcoin market in terms of daily trading volume. According to Skew, BitMEX is currently lagging behind Binance Futures, Huobi, and OKEx in this regard, and Bybit is closing the top five, right after BitMEX.
What is the meaning of these changes in the futures market for bitcoin?
These changes in market shares in the bitcoin industryhave a symbolic meaning. They say that the cryptocurrency market as a whole is becoming more mature, evolving and changing after many years of dominance of several exchanges and companies.
For example, in 2017, the price of bitcoin reached 20$ 000 At that time, mainly retail investors dominated the market. In December 2017, the Grayscale Bitcoin Trust had about $ 3 billion of assets under management (AUM). As of mid-May 2020, the price of bitcoin fluctuates at the level of $ 9000-9500. But at the same time, the number of assets under the control of the same investment instrument is at the level of $ 3.279 billion, despite the fact that the price of BTC today is half that of three years ago.
The amount of assets managed by Grayscale isThe most important indicator of institutional activity in the cryptocurrency market. The financial instrument proposed by the trust is a publicly quoted stock in the United States that allows institutions and accredited investors to invest in BTC through the purchase of a share in the trust. Today, it remains the only alternative to an exchange-traded fund (ETF) that US institutions can rely on to invest in BTC.
Compared to 2017 and early 2018The infrastructure of the cryptocurrency industry has reached a qualitatively different level. The cryptocurrency user base has also changed. The perception of bitcoin among investors in the financial sector has also changed after Paul Tudor Jones entered this market. Speaking in the Scoop podcast, billionaire investor Mike Novogratz said Paul Tudor Jones’s bitcoin investment in the long term “will open [in front of the cryptocurrency market] a new universe.”
Until the end of 2019 on the Bitcoin market inspot trading and retail investors dominated to a large extent. The number of institutional investors and professional traders using derivatives is growing rapidly, making the market more balanced between casual, professional and institutional investors.
Bitcoin begins a new decade afterhow the early market participants spent the first 10 years creating a fundamental infrastructure that allows cryptocurrencies to grow. It is natural to see key structural changes in the cryptocurrency market and a trend change in all submarkets, including futures, spot, institutional investments and options.