If No Precautions Are Taken, High Leverage Ratings Will End the Crypto Money Market!

Bitcoin price recently dropped to $ 3,600 in BitMEX and $ 3,800 in Bitfinex, recording its biggest one-day drop in seven years. The sharp decline in the biggest cryptocurrency occurred during the sharp declines in the US stock exchanges.

Bitcoin, at least theoretically, should have been a safe haven from the chaos of traditional financial markets, while it began to fall in parallel to the stock markets in the past two weeks. The downtrend intensified with higher leverage rates that pushed BTC below $ 4,000. Because many investors in the crypto money market are trading with borrowed capital, they are at risk of liquidating leveraged positions when the price of Bitcoin suddenly drops by 20 percent to 30 percent. In futures, a liquidation occurs when the price moves against a long or short contract, which causes the entire position to close.

Using a higher leverage position increases the chances of liquidation. For example, if a trader uses $ 1,000 to trade $ 5,000 (5x leverage), the probability of liquidation is much lower than a trader uses $ 1,000 to trade $ 20,000 (20x leverage). As the amount of liquidation increases, much larger decreases occur and the market remains vulnerable to these declines.

Large cryptocurrency futures exchanges such as BitMEX, Binance Futures, Huobi and OKEx make up most of the daily Bitcoin trading volume. In futures exchanges, investors bet on whether the price of an asset will rise. For this reason, leverage is the biggest part of this article. For example, BitMEX can process large volumes of orders daily due to its 100x leverage support; In the XBTUSD permanent exchange, crypto traders can borrow up to 100 times their current capital, mainly for Bitcoin trading.

Investors trading with such levers can make big gains when they make the right prediction, but a false prediction will result in huge losses. And these losses have a huge impact on the market because a trader that trades $ 1,000 with 100 times leverage can trade $ 100,000 in Bitcoin. A few traders who trade with relatively low amounts of money with high margins can cause massive losses that lower the price of Bitcoin.

The impact of BitMEX in the cryptocurrency world is quite high. So much so that the daily volume of BitMEX is more than the top five spot exchanges in the global crypto market and ranges from $ 2 to $ 4.5 billion. According to Bitwise Asset Management’s Bitcoin Trading Volume, the top five crypto money spot exchanges are Binance, Coinbase, Bitfinex, Kraken and Bitstamp. The daily volume of the five exchanges is $ 1 billion, $ 289 million, $ 149 million, $ 149 million and $ 113 million, respectively.

How High Leverage Dropped Bitcoin to $ 3,000 Levels

The highly leveraged nature of the Bitcoin market has always left the biggest cryptocurrency vulnerable when large price movements are experienced in short time frames.

Most of the short term price movements in crypto currencies are due to the increase in long or short contract liquidation in large crypto money futures exchanges. A whale or a person with a large amount of BTC can print on long or short positions by market maker or market vendor orders. When Bitcoin price fell more than 50 percent on March 12, falling from $ 7,900 to $ 3,600, only 1 billion dollars were liquidated in BitMEX only.

The real problem arose when Bitcoin price fell below $ 5,000. The price drop was so severe that the order book in BitMEX was almost empty. As a crypto trader known as Lowstrife points out, when Bitcoin price was at $ 4,000, there were nearly $ 200 million in sales orders against the $ 18 million buy order on the liquidation engine.

There was only 18 million left in the entire orderbook with, (my guess) 200-300m still left in the liquidation engine. With the market evaporating before their (our) eyes, I believe the decision was made to kill the market as a circuit breaker.https: //t.co/VtjacSGyGB

/ 5

– lowstrife (@lowstrife) March 14, 2020

With the closing of BitMEX, the liquidation engine was stopped from liquidating more BTC and Bitcoin price started to recover in other exchanges. In a way, turning off BitMEX served as a circuit breaker and prevented the market from falling to unprecedented levels.

AriT, the managing partner of BlockTower Capital, claimed that when Bitcoin price fell below $ 4,800, investors did not actually prefer to sell. Sales pressure came primarily from BitMEX and major liquidations, and then sales orders gained weight in the market. Searching or liquidating the margin of more than $ 10 million in large long contracts recorded a number of liquidation and stop transactions that caused panic in the market.

All data suggests that the biggest reason behind Bitcoin price dropping from $ 3,600 to $ 3,800 is its highly leveraged cryptocurrency structure. Experts say that the “unhealthy leverage” supported by the cryptocurrency market leaves the market quite vulnerable to an oncoming crisis.

BitMEX and Binance Futures support up to 125x leverage, for example. This means that a trader can trade with $ 1,000 to $ 125,000. However, excessive volatility can cause traders using high leverage to lose their positions, so if their losses exceed their current capital, exchanges close their positions to make sure they can repay what they lost.

What can be done to prevent this from happening?

Some traders have identified the short-term price correction that has destroyed Bitcoin’s 8-year market trend as the failure of BitMEX’s liquidation engine. Although the crypto trader Lowstrife did not believe that BitMEX caused a price drop, the BitMEX liquidation engine was not ready for such a big drop in a short time, it was coded incompletely.

Some industry executives suggested the idea of ​​integrating circuit breakers into the cryptocurrency exchange at similar dips, as applied on the US exchanges. Multicoin Capital managing partner Tushar Jain said:

Today’s cryptocurrency price movements are a strong argument for industry-wide circuit breakers. The cryptocurrency markets are structurally dispersed today and leading exchanges need to work together to prevent a similar event from happening again.

Jain continued his words by saying that sectors that depend solely on the price of “cryptocurrencies”, such as the decentralized finance (DeFi) market, have almost died due to 50 percent depreciation of Bitcoin, Ethereum and other major cryptocurrencies.

DeFi is a set of platforms that enable users to make their loans and payments decentralized and aim to facilitate traditional financial services. Most users use DeFi platforms to lend money using Ethereum as a collateral in exchange for interest. In early 2020, there was an exponential growth in decentralized finance in the DeFi market, with more than $ 1.2 billion of Ethereum secured, but with the Ethereum price dropping by 56 percent in less than 20 hours, there was a significant amount of liquidation that led to the collapse of the DeFi market and steam. In this regard, he said:

The entire DeFi ecosystem is almost dead today. Several major market participants went bankrupt. Many traders were unable to carry their money quickly enough to trade the trades due to blockchain congestion literally, and the high volatility worsened the situation.

Its recent breakdown in the market has sparked controversy that cryptocurrencies could die in just a few hours. Above all, it is started to be said that it is now necessary to consider the use of a circuit breaker across the market.