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Analysts weigh in on Bitcoin's Black Thursday

#crypto #bitcoin

On Thursday last week, global markets experienced a turbulent day of sell-offs as the reality of COVID-19 hit. Both crypto spot and derivative platforms struggled to manage the volatile trading activity. Some exchanges briefly shutdown to meet short term liquidity and capacity requirements.

'A leveraged washout'

Over the last few years, the launch of regulated platforms like CME and Bakkt has invited a new breed of traders into the crypto asset market - institutions.

Now, as the global economy teeters on a COVID-19 driven collapse, some analysts suspect that institutions have got swept up in a global margin call that has forced them to sell their crypto assets.

"Today proves that institutions buying Bitcoin has a flip side," tweeted Bitcoin educator Jimmy Song in an attempt to pin blame on the big players.

This idea is supported by anecdotal evidence from retail-focused exchanges, with American Coinbase and British CoinCorner both reporting order books stacked in favor of buyers, and not sellers during last week’s market rout.

But, as economist Alex Kruger pointed out the week before the big sell-off, Bitcoin futures trading volumes on CME had already "collapsed" before the real panic started, suggesting institutions may already have moved capital elsewhere, and thus played little part in precipitating the drop.

Bitcoin bull Mike Novogratz also doubts the drop was driven by professionals. "Institutions aren’t fast enough to sell like that," he tweeted. "That was panic selling from people who bought on margin," adding, “that was a leveraged washout.”

The BitMEX 'circuit breaker'

According to Datamish, a total of $618 million worth of bitcoin was lost in just a few hours as traders with long positions were squeezed, triggering a cascade of liquidations.

So fast was the fall that the Basis — defined as the difference in price between spot and Futures — reached up to $800, suggesting that mass selling on BitMEX was pushing the price down.

Then, when BitMEX suddenly went offline citing an ambiguous 'hardware issue," the selling pressure subsided and price quickly rebounded—leading traders to suggest foul play.

That such high-octane trading action should coincide with exchange downtime is not unusual in the crypto markets, and often leads critics to cry manipulation. But this time, suggests CEO of rival derivatives exchange FTX Sam Bankman-Fried, was different.

In an admittedly 'insane theory', Bankman-Fried alleges that instead of buckling under the pressure of trading, BitMEX purposefully pulled the plug on its liquidation engine to prevent Bitcoin sinking even further and save the insurance fund.

This theory has since been dismissed by BitMEX on Twitter, but also promoted by several high-profile traders including Luke Martin.

If true, the BitMEX intervention would be just another point of similarity between cryptocurrency and the ailing U.S. stock market, which has already tripped more than one 'circuit breaker' in the last few days as selling in the S&P 500 has dropped by 7% in a session.

Unfortunately with a bungled late response to the COVID-19 threat from the UK and the U.S., the world is now certain to suffer significant economic pain in the months ahead.



Kieran Smith, Khareem Sudlow