The crypto industry won’t soon forget when the widening coronavirus pandemic sent digital currencies tumbling along with most other asset classes worldwide.
Market heavyweight Bitcoin dropped 37.5% on March 12, recording its third-worst 24-hour performance ever -- and the largest decline since the coin entered the mainstream conscience in 2017, according to researcher Coin Metrics. On Huobi, one of the largest digital exchanges, more than 10,000 leveraged users’ positions got liquidated, according to the company.
“This was by far the most volatile day in the modern history of Bitcoin,” said Nic Carter, co-founder of Boston-based Coin Metrics.
Historically, price volatility has been good for crypto exchanges, which make the bulk of their money from trading fees. But for some exchanges, the crash is proving to be a negative even with prices rebounding. BitMex has seen an exodus of about 91,000 Bitcoins valued at more than $700 million, as trades blew up or speculators took funds elsewhere, according to data examined by Coin Metrics.
Several other exchanges, such as Bitfinex, have also lost Bitcoin deposits, according to Coin Metrics. And pretty much everyone’s trading volumes have fallen. The average daily volume of top derivatives exchanges, including Huobi, BitMex and OkEx, dropped from 30% to nearly 60% between March and April, according to researcher CryptoCompare. Average daily volume on many spot exchanges, including Binance and OkEx, also dropped by at least 10%, according to CryptoCompare.
The crash “makes us very worried, and it’s not a good thing for the exchange,” said Ciara Sun, vice president of global business at Huobi Group, the exchange’s parent company. “When people get hurt and get liquidated, it means we lost a lot of customers. And it hurts the whole ecosystem. Some customers, when they got liquidated, they definitely need time. Others will not come back.”
Since the crash, Huobi saw a sharp decline in the number of large institutional traders, holding between 10,000 and 100,000 Bitcoins, Sun said. But the exchange saw an influx of small retail investors holding no more than one Bitcoin, she said. Still, the number of new registered users and daily active traders decreased in April compared to February and January, she said.
“Overall liquidity is down a fair bit, and everyone has to contend with that,” said Sam Bankman-Fried, co-founder of Alameda Research, a large crypto trader that also runs an exchange. “Volatility is up a fair bit, so a lot of people are providing less than they used to.”
One of the biggest problems was extreme leverage. BitMex, for example, offers as much as 100 times leverage on futures contracts, and when trades go bad, users are at risk of facing margin calls on what’s borrowed that can end up leading to the liquidation of their position.
Some exchanges also didn’t have the infrastructure to meet the stampede of selling. And at the height of the crash, BitMex said it was hit by two denial-of-service attacks -- a move that delayed and prevented trades, and likely staved off a further drop in Bitcoin’s price.
“While no exchanges blew up this time, it was a reminder that they are inherently fragile,” Carter said. Nowadays, even exchanges that didn’t go down during the crisis are beefing up their infrastructure -- Binance is one of then, said Zhao “CZ” Changpeng, chief executive of the world’s largest spot exchange.
“We are changing a lot of our internal systems, just to be very cautious and conservative and be safe about it,” Zhao said. “The No. 1 thing we are focused on right now is just to increase system capacity.”
Binance’s new-users sign ups are higher than they were in February “by far,” Zhao said. “It’s possible users from other exchanges are moving to our platform.”
Bitfinex said it has not lost share after the crash. It recently launched Bitfinex Pulse, a social network that lets users interact with each other.
“We believe that this solution will help traders find trustworthy news and obtain quality, real-time data,” said Paolo Ardoino, an executive at Bitfinex.
BitMex, meanwhile, rolled out a new futures contract on April 24. “In the last few weeks, our teams have rolled out a number of new features, platform upgrades and products to further enhance customer experience,” according to a company spokesperson.
For now, the largest exchanges are not changing their leverage policies, but they are making other tweaks. Huobi instituted a flavor of a circuit breaker: Instead of halting trading, the software will halt liquidation orders on positions where the margin ratio is less than or equal to zero when abnormal price deviation between the market price and liquidation price is identified. The exchange has also begun doing partial liquidations -- essentially, liquidating a user’s positions in parts instead of in one fell swoop.
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