Original title: Bitcoin Had a Flash Crash
Original author: Matt Levine
Original source: Bloomberg
Compiled by: BitpushNews Yanan
There are about a dozen stock exchanges in the United States, and every stock is listed and traded on each exchange. Every now and then, a stock will be priced slightly lower on one exchange than on another. There are countless books and analyzes on this situation, and many people have "deeply cultivated" this field and made a lot of money.
However, these differences are insignificant relative to the overall market. If I told you that over the past hour Apple stock has been trading at $174 on NYSE Arca and $175 on Nasdaq over the same period - you wouldn't Believe me.
And one of the reasons why I say this is that market-related rules prevent large price differences from occurring. Another reason is that securities trading is now fully computerized, all prices are public and transparent, and there are always people who are keenly aware of any small price differences and profit from them. If Apple stock were, as stated, $174 on Arca and $175 on Nasdaq, the arbitrageur would immediately buy the stock on Arca and then sell it on Nasdaq, thereby making a risk-free profit. instant profits.
As a result, many arbitrageurs will swarm in and quickly flatten the price difference in a very short period of time.
However, for arbitrageurs who make a career out of profiting from price differences, this is not entirely the case - using high-frequency trading systems, they can capture profit opportunities on tiny price differences in a very short period of time, such as at $174.99 Buy a stock, then sell it for $175 and make a small profit.
However, it should be emphasized that this phenomenon is not common on normal time scales. There will also be no situation where the price on one exchange is $1 below another for a full hour, as we saw with Apple stock.
However, the above example only works if there are many arbitrageurs, deep pockets, and high-speed computers. At the same time, the realization of arbitrage business is also inseparable from heavy investment in technology and supervision to ensure that these arbitrageurs can connect to all exchanges, obtain price information in a timely manner and quickly transfer funds to exchanges with lower quotations for trading.
We can imagine a different trading scenario. Imagine that the New York Stock Exchange and Nasdaq are located in different corners of the city center. In those days, traders had to take horse-drawn carriages and travel through the streets of the city to trade. Moreover, they could not use telephones to communicate instantly, and each transaction depended on the decision of one trader. Therefore, the price difference between different exchanges could reach several dollars, and this gap might last for hours. In fact, such a scenario is not difficult to understand, because about 100 years ago, the market worked in a similar way. However, this is obviously very different from the market we have now, which is traded automatically by computers.
Then, let’s talk about Bitcoin.
Unlike previous discussions of stock exchanges, Bitcoin’s world is decentralized – there is no single authority coordinating prices across all exchanges. Late on March 18, the price of Bitcoin against Tether’s USDT stablecoin plummeted to $8,900 on the BitMEX exchange, while the price of Bitcoin on other trading venues during the same period was above $66,000. The incident highlights the potentially huge volatility in the Bitcoin market.
However, a BitMEX spokesperson stated that they had launched an investigation into the incident and found that "aggressive selling behavior by a very small number of accounts caused the price to deviate from the expected market range." However, the exchange's system is operating normally and all user funds are safe. of.
BitMEX exchange said in a post on the social media platform that they are "investigating potential misconduct in the Bitcoin/USDT spot trading market."
Unlike traditional stock exchanges, BitMEX does not have an in-house market maker. According to the post, the orders to sell Bitcoin at the time were "so large and frequent that independent market makers and other traders had no time to react."
The post also mentioned that this incident did not have any impact on BitMEX’s derivatives market, nor did it trigger any forced liquidation.
According to the % slippage, resulting in losses of at least more than $4 million.”
"syq" further said, "I guess their selling may have come to an end for the time being. In the past 3.5 hours, the total transaction volume was close to 1,000 Bitcoins, and the lowest price once fell to $8,900. BitMEX has currently suspended the withdrawal function."
It’s worth noting that prices this low didn’t last long, but there was a period of about 10 minutes of extremely low prices. Moreover, every time this whale sells 10-50 BTC, it causes the price on BitMEX to be much lower than what other exchanges are offering.
Like I mentioned before, if I was making a market trade in Bitcoin on Coinbase and I noticed that the price of Bitcoin on BitMEX plummeted to $8900, I would definitely immediately go to the BitMEX platform and start buying at, say, $9000 Bitcoin. This is simply free money!
So why doesn't anyone do this? It's possible that someone did, and the price gap eventually narrowed - but judging from BitMEX's post, this seems to be more because whales stopped selling rather than someone actively stepping in to buy.
However, the more important reason lies in the essential differences between cryptocurrency exchanges and stock exchanges. In the U.S., when you buy a stock on a stock exchange, your money doesn't go directly to the exchange. Instead, it goes through a clearing house and is paid to the seller (who in turn delivers the stock to you through the clearing house). All U.S. stock trades are settled by one major clearing house, to which every exchange and broker is connected. So if you were an arbitrageur and wanted to buy $100 million worth of stock, you wouldn't have to deposit $100 million on each of the 12 exchanges in order to trade on the exchange with the lowest quote at any time. All you need to do is deposit $100 million with your brokerage, and your brokerage will handle settlement for you regardless of which exchange you actually execute the trade on.
In the cryptocurrency world, exchanges typically hold funds for their customers. However, this approach brings some problems. Sometimes, exchanges accidentally lose users’ assets, or even someone abuses their authority to misappropriate funds. As a result, traders need to be particularly careful and they need to carefully evaluate the credit risk of the exchange. After all, no one wants to put a large amount of money, such as $100 million, on an exchange that may have problems and where the funds are not safe. Therefore, every time traders want to trade on a new exchange, traders need to conduct a credit risk assessment to ensure the safety of their funds.
Beyond that, there's an operational issue: even if the exchange is reliable, if you want to buy $100 million worth of Bitcoin on that exchange, you have to deposit $100 million on that exchange, which means These funds cannot be used on other exchanges.
BitMEX revealed in a post about the market flash crash: "Yes, we are investigating whether there is misconduct by traders in the Bitcoin/USDT spot trading market. Maybe you don't know, but we actually also provide spot trading services. Oh!" The post also included a naughty expression. To be honest, though, the BitMEX spot market is really no big deal to BitMEX or its customers, or even those who specialize in spot Bitcoin trading. BitMEX has always claimed to be the "leader in cryptocurrency derivatives trading." Compared with its own derivatives market, the exchange's spot trading volume is really pitiful.
If you are in the business of exchanging Bitcoin for US dollars (or USDT), you will probably be more willing to use your own funds and technology to operate on large spot Bitcoin exchanges like Binance and Coinbase, which will be more efficient. BitMEX’s spot trading market is, at best, the icing on the cake. If Bitcoin suddenly drops sharply for 10 minutes on BitMEX, you may not have time to transfer funds to buy the bottom.
BitMEX mentioned the possibility that someone might want to manipulate the market. BitMEX is mainly a large platform for cryptocurrency derivatives trading, but it also has a relatively small spot Bitcoin trading section. If you had some bearish Bitcoin derivatives contracts (that is, you hoped to make money if the price of Bitcoin fell), you might be able to drive the price down by selling Bitcoin in large quantities. In this way, even if you lose money on spot transactions, you can still make money on derivatives contracts. Especially when the size of your derivatives contract is large, but the volume of spot selling is not very large, because the trading volume in the spot market is relatively small, it does not actually require much funds to lower the price. That could make it a pretty good deal.
“This incident had no impact on the multi-billion dollar derivatives market. It did not cause market price fluctuations or trigger any forced liquidations because our indices are independent and rigorously tested” – BitMEX again reiterate.
I think another possibility is that this is just an operational error, or something like that: someone has a large amount of Bitcoin on BitMEX and wants to sell them. In fact, there are many safe ways to do this, such as selling slowly and in batches. Alternatively, withdraw Bitcoin from BitMEX and deposit it into another exchange with a larger spot market, more liquidity, and more market makers, so that the impact of a large sell-off will be smaller. The Bitcoin market is not as tightly connected as the stock market. If you wanted to sell all your Bitcoins at once on the exchange you use, it could cost you dearly.
