Nowadays every Bitcoin price drop is a reminder of ‘Black Thursday.’ On March 12, the price of the largest cryptocurrency in the market dropped by over 50 percent to a 12-month low and marked the biggest single-day drop over seven years.
Despite the severity and the swiftness of the drop, it was not remembered as just another price drop. Since the price drop was concentrated in hourly and not daily windows, many traders hopeful of taking advantage of the volatility rushed to derivatives exchanges which sported high leveraged trading.
Owing to the rush of volume and volatility some exchanges could not handle the volume. One, in particular, was signaled out for allegedly stopping trades during the price fall. BitMEX, the Seychelles based derivatives exchange, was called out for using a “circuit breaker,” with the exchange later clarifying that the stoppage was due to a DDOS attack.
Looking back at the events of ‘Black Thursday’ and the alleged use of the circuit breaker [despite the ethics of using it] other exchanges now know the effect of willfully halting trading, but would they choose to? Or is there a way to handle a single exchange employing such a tactic?
Jay Hao, the CEO of OKEx, speaking to AMBCrypto stated that an “incremental approach,” rather than a point-blank halt is better. Such an approach would set up a “robust liquidation engine,” and including position limits on new customers. However, if such a situation does arise when the price is dropping thick and fast, and one exchange pulls the plug, the gap will be filled by other exchanges, said Hao,
“We have to take into consideration that the crypto market is universally linked and its liquidity is shared. So if one major exchange has a circuit breaker while the others keep on trading, the sell-off pressure would simply transfer to other exchanges”
Following the Black Thursday sell-off and the allegations against BitMEX, there was a visible exodus of customers. Prior to the crash, BitMEX regularly had the highest BTC Futures volume, but now it stands fourth behind Huobi, Binance and OKEx.
Aaron Gong, VP of Binance Futures suggested that the use of a circuit breaker in the cryptocurrency market would be taking from the playbook of traditional finance. In March as the first wave of Covid-19 cases began rising, stock markets saw a massive freefall with regulators in the United States and India using circuit breakers to stop the market.
However, Gong said that such a device for the crypto market would have to be of the “right matrix,” given the volatility and lack of trading gaps that the crypto market has.
Going forward, despite exchanges knowing that a circuit breaker can be used, it is unlikely to be. To put it simply, the short-term gains of using a circuit breaker is not worth the long-term cost of losing customer confidence and market share to hungry competitors.
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