In the first six weeks of 2020, the crypto market soared. With the Bitcoin block reward halving in anticipation, investors sought to profit on the expected long-term price increase that had followed the previous two halving events. In anticipation, Bitcoin rallied from $7,000 to over $10,000 while several major altcoins doubled (or more) in price, such as Ethereum, EOS, and Bitcoin Cash. News articles were predicting that the market would never dip below current levels again and at the rate that it was accelerating, it seemed plausible. Simultaneously, suspicions were arising that cryptocurrencies could be safe-haven assets in the event of economic turmoil. But both of these theories were swiftly debunked on March 12, 2020 (or Black Thursday, as it’s been dubbed), when the cryptocurrency market crashed spectacularly.
On BitMEX, the largest cryptocurrency derivatives exchange and the principal site of the occurrence, Bitcoin perpetual futures contracts traded at $7,353 at 10:00 AM UTC. By 2:00 AM the next day they had dropped to only $3,978, bottoming out at $3,596 (around $400 lower than the spot BTC-USD price at the same time) shortly beforehand. This caused major panic for investors, and the entire market fell apart and subsequently reformed in a slightly different manner.
The market didn’t crash all at once; in fact, it happened in two rather distinct legs. The first large decrease in value for Bitcoin took place at approximately 10:45 AM when the price dropped to $5,678. This is believed to result from investors selling off their holdings due to concerns regarding the economic impact of the ongoing COVID-19 pandemic. In this movement, over $700 million of Bitcoin perpetuals was liquidated on BitMEX due to leveraged positions. This happens when the contract value moves far enough in the opposite direction as a trader’s position and they don’t maintain enough collateral to cover the move. Naturally, there was also a long squeeze as investors sold their positions in an attempt to mitigate losses, furthering the rapid price drop.
The second decrease in value happened around 15 hours later and was even more damaging to the market. Bitcoin perpetuals on BitMEX had plummeted below $4,000 for the first time in almost a year. This movement is believed to result from a lender liquidating the collateral received from the ill-fated investors from the first price drop. Because BitMEX requires all collateral to be in Bitcoin, the value of investors’ collateral decreases as the value of their perpetual position decreases. This adds to the domino effect of selloffs. By this point, there was upwards of $1.4 billion in liquidations on the exchange, and BitMEX’s insurance fund had lost 1,627 BTC. The contract’s funding rate — the metric used to regulate its price by guiding it towards the spot — sunk down to -0.375%. This means that short-holders would pay long-holders a fee of 0.375% every eight hours, amounting to 400% annually. In theory, the carnage shouldn’t have stopped there and the downward acceleration in price could have continued until Bitcoin was totally worthless, but luckily that isn’t what happened.
At 2:16AM on March 13, 2020, BitMEX itself crashed. The entire service stopped, and frantic investors were faced with nothing more than a message stating that the exchange was experiencing system instability and that it was currently down for maintenance. BitMEX announced that there had been a hardware issue with their cloud service provider and that all trading services would resume at 3:00 AM. Later, the exchange stated that a DDoS (distributed denial-of-service) attack caused the outage. Many investors were furious that BitMEX went down in their hour of need, but the unfortunate coincidence could have saved the exchange (and even the entire asset). For this reason, there is some suspicion that the outage was planned by BitMEX in order to prevent losses from escalating out of control. Regardless of the true cause of the shut-down, it had an overwhelmingly positive effect on the market, temporarily pumping the value of Bitcoin perpetuals back up to $5,300 when it reopened.
Despite the minor jump in its price, Bitcoin was still in a very turbulent state. The top cryptocurrency by market capitalization reached three-month implied volatility of 130% annualized (up from 67% a week before), and the implied volatility of one-month at-the-money Bitcoin options reached 184%. Both figures represented record highs. Bitcoin’s blockchain was immensely congested, especially given the fact that many miners shut down their operations to cut losses. As the price slowly started to rise again, an obvious effect on the crypto derivatives market began to appear.
BitMEX, the first Bitcoin derivatives exchange, launched in 2014 and had dominated the derivatives landscape ever since. Boasting high liquidity and volume as well as minimal know-your-customer requirements, its perpetual futures contracts were extremely popular. Up to two weeks before Black Thursday, the contract saw 115,000 BTC in open interest. But due to traders’ dissatisfaction with the exchange’s outage, this number fell dramatically by over 50% to 55,000 BTC. Interestingly, much of BitMEX’s volume moved to a different exchange, Binance. Binance had only launched its futures platform six months prior, but it offers up to 125x leverage as well as not subjecting traders to auto-deleveraging like many of its peers do. Five days after its outage, BitMEX had already been overtaken by Binance’s futures in terms of daily volume, reaching over $4 billion. As of mid-May 2020, BitMEX’s daily volume had slumped behind that of Huobi and OKEx as well. Its open interest, however, remains in second place, behind only OKEx.
While the same cannot be said for traditional markets, Bitcoin has now once again risen to close to its February 2020 peak. In early May, it briefly breached the $10,000 psychological barrier, now sitting at around $9,200 as of May 23, 2020. Investors have regained confidence in the market and increasing interest in the third block reward halving event led many to seek to hold the cryptocurrency long-term.
Though it might be unlikely that the crypto market will see another devastating blow like Black Thursday in the near future, there are still steps that traders can take to avoid being caught in a similar situation. The most important preventative measure is to maintain a safe leverage multiplier. At 100x leverage, a move of 0.7% in the wrong direction causes a position to be liquidated. Additionally, having faith in the market is extremely important. If everyone sells their Bitcoin positions at the same time, there would be no demand and thus the currency would be rendered valueless and its price would go to zero. So sit tight — sometimes it’s safer to keep calm and HODL on that it is to try to pull out during a turbulent time.