【Investigation】Unveiling the BitMEX Crash Event: Did the hero or the villain save Bitcoin?
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March 12-13, 2020, will forever be remembered as the black swan event in the cryptocurrency market. We all know that this major crash was triggered by the pandemic. Bitcoin failed to demonstrate its hedging properties and plummeted along with the U.S. stock market. As even the U.S. stock market experienced consecutive circuit breakers, Bitcoin, lacking hedging attributes, naturally could not escape the turmoil. During the black swan event, the most discussed topic was the abnormal performance of the BitMEX trading platform on that day. Let's take a look at the various conspiracy theories sparked by BitMEX's shutdown on March 13.
Note: The black swan effect refers to events that are highly unlikely to occur but do happen in reality.
Starting from the Billion-Dollar Liquidation of Contracts
BitMEX primarily offers leveraged Bitcoin contract products, allowing investors to use their capital as collateral and borrow funds multiple times their initial investment to speculate on the price movements of Bitcoin.
Therefore, when the price of Bitcoin suddenly drops by 20% or even 30%, the losses that investors have to bear are also calculated in multiples, putting their positions at risk of liquidation. In futures trading, when the price moves against the direction of the investor's long or short contract speculation and the margin is insufficient to cover the losses, liquidation occurs, leading to the forced closure of the entire position.
During the black swan event, the price of Bitcoin plummeted sharply in a short period. Many users holding long positions were liquidated (rapidly cleared, often due to insufficient margin to cover losses). According to data from March 12, when the price of Bitcoin plummeted from $7,900 to $3,600 (a drop of over 50%), BitMEX alone liquidated long contracts worth $1 billion.
During that period, BitMEX users not only experienced failed orders due to the platform's inability to handle a large number of transactions but also some users reported that their positions had reached the liquidation price, yet their positions were not forcibly closed. Eventually, BitMEX unexpectedly shut down all trading on the platform when Bitcoin broke $4,000.
This action by BitMEX triggered various speculations in the market. Some say BitMEX's shutdown was to save Bitcoin, while others claim it was for their own benefit. Let's examine these arguments one by one.
"Using Bitcoin as Collateral for Contracts" Accelerated Liquidations
When Bitcoin dropped below $5,000, BitMEX saw a large number of long positions liquidated. Liquidation can be simply understood as:
Triggering liquidation means users do not have sufficient margin to cover the losses from their long contracts. Therefore, BitMEX forcibly seizes these long contracts and sells them at market prices to ensure the market continues to operate.
So, when a large number of long positions are liquidated in a short period, it means the market will see a significant increase in short positions (selling Bitcoin at market prices), adding selling pressure and further depressing prices, leading to more liquidations in a downward spiral.
This situation is even more severe on the BitMEX platform because BitMEX offers "inverse contracts," also known as coin-margined contracts, where the collateral is Bitcoin, not stablecoins or U.S. dollars. This means that when the price of Bitcoin spot falls, not only will the contract price drop, but the value of the collateral will also decrease, further accelerating the rate at which users are liquidated.
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The Possible Truth to Save Bitcoin
Why do some people say that the BitMEX shutdown actually saved Bitcoin?
Due to the rapid decline of Bitcoin, BitMEX liquidated a large number of long positions, and everyone in the market was shorting. The image below shows BitMEX's funding rate when Bitcoin fell below 4000,
-0.375% indicates that shorts have to pay 0.375% to longs every 8 hours, which is 30 times higher than usual.
With no one willing to go long, once a large number of liquidated long positions are sold on the market at market price, it will cause a sharp drop in the contract price. Cryptocurrency trader Lowstrife speculated that at that time, there were only over $18 million worth of long orders left on BitMEX.
But there may be $200-300 million worth of long positions yet to be sold off in the liquidation engine. Once these longs are sold on the market, it would lead to BitMEX's Bitcoin contract price going to zero directly.
Supporters of this argument generally believe that the reason why there were longs that were liquidated but not cleared is because BitMEX couldn't clear these longs as it would lead to the price going to zero. Thus BitMEX chose to wait, waiting for the market to stabilize or for large holders or market makers to come in and take these positions. However, the situation continued to deteriorate, compounded by the congestion on the Bitcoin blockchain at that time, causing long wait times for deposits and withdrawals.
Ultimately, BitMEX announced a maintenance shutdown, essentially a de facto circuit breaker, halting trading. The massive selling pressure caused by liquidation disappeared, and the Bitcoin market price quickly rebounded. When BitMEX resumed, the number of people needing to be liquidated was significantly reduced, the selling pressure from liquidation was greatly alleviated, and with increased liquidity from long positions (more longs), BitMEX successfully averted the crisis of Bitcoin going to zero.
BitMEX Acting in Self-Interest
The following explains the shutdown event from the perspective of BitMEX acting in its own interest. Supporters of this argument believe that BitMEX's decision to liquidate was not to protect Bitcoin but to protect its own interests.
1) Insane theory of the day: there was no BitMEX hardware issue.
(such as FTX's founder Sam suspected that BitMEX's crash might not be a hardware issue)
Because in such situations, futures exchanges typically have two options: one is to use the insurance fund, and the other is to liquidate the opposing positions to prevent them from continuing to profit and maintain market balance.
The so-called insurance fund is, for example, if the liquidation price of a long contract is $5,000, but due to a rapid market decline, the contract market price quickly drops to $4,500, resulting in the contract being liquidated at $4,500 market price, the $500 price difference must be paid by the exchange's insurance fund.
If a large amount of liquidated Bitcoin is sold on the market at market price, it will inevitably lead to severe slippage, causing losses that BitMEX cannot cover. Therefore, BitMEX chose to close the website and wait for the price to rise.
After BitMEX came back online, due to the market rebound, the spot price (mark price) and contract price showed a significant spread.
While BitMEX's contract price remained around $4,500-4,800, the spot price of Bitcoin (mark price) had risen above $5,400. Due to the significant spread between the mark price and the contract price, the system made more money, which would be stored in the insurance fund. After a series of liquidations, BitMEX's insurance fund increased to nearly 2,000 Bitcoins.
BitMEX Insurance Fund Historical Record, March 12-13 for Increase (source: BitMEX)
Supporters of this view believe that another futures exchange, Deribit, significantly reduced its insurance fund during that period, and even had to dig into its own pocket to maintain market operation.
In contrast, when faced with market pressure, BitMEX would only choose to protect itself and prioritize its own interests. While other exchanges reduced their insurance funds, BitMEX increased its holdings by 2,000 Bitcoins, transforming the insurance fund into a speculative trading tool controlled by BitMEX, only utilizing it based on investor needs in extreme situations.
Rashomon
The above two points are the most discussed views in the market, and BitMEX has also given its own explanation afterward, claiming that the system service interruption was due to a DDOS attack on the platform. However, many users are still skeptical, believing that this is just an excuse from BitMEX. Which explanation do you find more credible?
Further Reading
Will high leverage contracts cause Bitcoin to go to zero? BitMEX's crash prevented the price from falling further, what went wrong
BitMEX responds to the Bitcoin crash-day outage, stating that there are no issues with the liquidation mechanism: the main reason is a DDoS attack
Will high leverage contracts cause Bitcoin to go to zero? BitMEX's crash prevented the price from falling further, what went wrong
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