data taken at 9:49am 09/10/2020
Written by: Yves, Head of Trading at Wirex
The Bitcoin price (BTC/USD) tumbled yesterday by more than 4.5% within 6 hours after the US regulators filed charges against the cryptocurrency exchange BitMEX. BitMEX is one of the top five derivatives exchanges by open interest with a 24h Open interest today of more than 764 million US dollars. The 40 pages document outlining the complaint by the Commodity Futures Trading Commission (CFTC) blames the exchange for “deriving its profitability from its extensive access to the United States markets and customers” without being registered with the CFTC. Allegedly, “BitMEX accepted bitcoin deposits worth more than $11 billion from at least 85,000 user accounts with a U.S. nexus” and from sanctioned countries like Iran. It “has not implemented rules or procedures to achieve compliance with the core principles required of Designated Contract Makers (DCMs) or Swap Execution Facilities (SEFs) under the CEA and Regulations”. Although a CFTC action was expected as the regulator was already investigating the exchange back in June 2019, the severity of the measures that unfold yesterday seems to have surprised the cryptocurrency market. Charges are held against the CEO and the three co-founders over money laundering and one of the founders was arrested yesterday.
The BitMEX event did not spare the Bitcoin market and the volatility surged for a few hours, but still, the price impact is lower than usual. There are probably three reasons to explain why Bitcoin did not drop more:
- The dollar (DXY Index) slightly decreased this week (down close to 1% since last Friday). The depreciation pushed back the BTC/USD price to $10,950 before the BitMEX event, and most likely helped support the price post-event.
- The cryptocurrency market is used to the negative impact of governments regulations. It bounced back everytime and it is always growing more resilient. The time when regulatory crackdowns used to drive prices 15 or 25% lower seems to be behind us… Between March 7th and 8th 2018, Bitcoin fell 15% when the CFTC was allowed to regulate cryptocurrencies as commodities, and the SEC announced that crypto exchanges must register. The main cryptocurrency fell by nearly 25% in November 2018 when a rumor arised over a potential ban by South Korea. Regular severe price drops happened with every decision from the Chinese authorities to clamp down on cryptocurrencies. Bitcoin proved to be resilient so far. Therefore, every correction could be perceived as an opportunity to invest.
- The BitMEX share in percentage of the total BTC derivatives open interest was already decreasing as observed on the “BTC futures - Aggregated Open Interest” graph provided by skew.com. By contrast, competitors like OKEx, Binance and Huobi are increasing their share. The reason is that the BitMEX exchange only takes Bitcoin as collateral. When the Bitcoin price drops, the collateral value and the long futures position depreciate together, therefore the risk of liquidation is structurally higher. This is a correlation risk that traders are more reluctant to take. In other words, traders are just more reluctant to bid Bitcoin futures with Bitcoin collateral on BitMEX. As à result, the future-spot basis is systematically lower on BitMEX compared to the ones observed on competing venues. Cash and carry trading strategies would earn additional returns on almost any other competing venue…
The BitMEX “BTC futures rolling 3mth basis” was cut by half yesterday. As expected, traders have been aggressively closing their long future positions on this exchange. The move was also observed on other derivatives exchanges. A priori, most of them have a similar profile when it comes to Compliance and AML management. Like BitMEX, most are also incorporated in offshore jurisdictions. Most also state that they do not accept US customers on their platforms… statements that are understandably difficult to measure…
On the fundamental side this week, Cambridge published its 3rd Global Cryptoasset Benchmarking Study last week, reminding us of the impressive rise in the total number of cryptocurrency users. Their floor estimate accounts for 101 million identified cryptocurrency users, against 35 million 2 years ago. The report also estimates that 70% of cryptocurrency users are retail clients, and 30% are businesses and institutionals. The fundamental growth of the crypto economy is certainly there, and institutionals are less easily scared away by the market’s volatility.
The growth is boosted by centralized and decentralized projects alike. DeFi pulse reports again that the number of BTCs locked in DeFi reached a new high at 137K BTCs, although the number of ETHs locked seems to have plateaued.