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Should virtual currencies have circuit breakers? The situation in the US stock market has sparked widespread discussions. Zhao Changpeng responds: "Hello"

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Should virtual currencies have circuit breakers? The situation in the US stock market has sparked widespread discussions. Zhao Changpeng responds: "Hello"

Traditional stock exchanges use "circuit breaker mechanisms" to curb panic selling when a black swan event occurs, but the cryptocurrency market lacks such protective measures. As a result, sharp drops in cryptocurrency prices are not uncommon. Should cryptocurrency exchanges consider adopting similar practices?

Traditional Financial Circuit Breakers

On March 9th, the New York Stock Exchange triggered a circuit breaker due to a significant drop in the S&P 500 index during the early trading session, leading to a 15-minute trading halt. Circuit breakers are protective measures triggered when the underlying asset experiences a rapid decline within a short period (e.g., S&P 500 dropping over 7% on March 9th) to prevent further market decline due to panic selling.

But what exactly is a circuit breaker? Let's go back to October 19, 1987, known as Black Monday in the financial industry, a day that remains etched in financial history. The Dow Jones Industrial Average plummeted by 508 points (approximately 22.6%). This global stock market crash led by the New York Dow Jones triggered financial panic and the subsequent economic recession of the late 1980s. It was in response to this event that the U.S. Securities and Exchange Commission approved the implementation of circuit breakers by various exchanges.

According to the rules of the New York Stock Exchange, circuit breakers are divided into three different thresholds measured against the previous day's closing price of the S&P 500 index: a decline of 7% (Level 1), 13% (Level 2), and 20% (Level 3). When the first two levels are reached, trading is halted for 15 minutes. If Level 3 is reached, trading is immediately suspended until the next day's opening.

Should the Cryptocurrency Market Introduce Circuit Breakers?

With BTC prices dropping over $1200 in the past few days, some believe it's time for cryptocurrency exchanges to establish similar mechanisms. Catherine Coley, CEO of Binance.US, tweeted that monitoring and learning from how other markets handle volatility and liquidity issues would be beneficial.

Historical data shows that Bitcoin has only experienced double-digit daily declines 84 times, with only 23 occurrences after 2016. Using a 10% drop as a trigger factor would not be a drastic change for the industry, as historically, such triggers have been infrequent.

Some may argue that this goes against the decentralized spirit of cryptocurrencies. However, since most trades occur on centralized exchanges, which contradict the idea of decentralization, having such a mechanism could prevent incidents like the 2018 Binance VIA hackattack from happening.

Feasibility Concerns

However, not everyone agrees on the feasibility of introducing such mechanisms to the cryptocurrency market. Binance founder Changpeng Zhao (CZ) tweeted:

"Hello? Circuit breakers are only applicable to fully monopolized exchanges. Bitcoin trading is a free market, where trading can occur across multiple exchanges. This simply won't work... Not to mention decentralized exchanges. And who said 7% is the right number, why not 1% or 70%?"

https://twitter.com/cz_binance/status/1237560428164567041

Cryptocurrency trading is inherently a free market, and imposing a uniform standard across exchanges is challenging, as CZ rightly points out.

However, some netizens took the opportunity to mockingly comment under CZ's post:

"In the cryptocurrency market, we call this mechanism 'temporary maintenance'."

This was a subtle dig at Binance's recent system glitches that led to multiple instances of temporary shutdowns for maintenance.

Further Reading

  • Amidst the pandemic, oil price crash, and stock market turmoil: Bitcoin breaks below $8000, how do Twitter analysts view this?
  • Ether plunges, triggering the largest liquidation in almost a year for lending protocol Compound

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