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Lagging Bitcoin futures premium shows BitMEX is losing investor trust

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For BitMEX, 2020 has been quite a rough year and from the look of things it’s only set to get worse. 

The popular derivatives exchange is no longer as relevant and impactful on crypto market price action as it was 2 years ago, but a significant short-term price correlation among top exchanges has been proven repeatedly.

A well-documented case occurred in May 2019, when a large sell order on Bitstamp caused a cascading $250 million liquidation on BitMEX.

The following month, a Coinbase exchange outage triggered a $1,400 Bitcoin (BTC) price nosedive, as reported by Cointelegraph. A well circulated report by Bitwise Asset Management clearly showed that the top exchanges traded “extremely tightly.”

The report detailed how top exchanges influence pricing suggested that their movement is synchronized even when measured in milliseconds. 

While BitMEX has denied the CFTC allegation of operating an illegal derivatives exchange, the problem is markets are not taking those words at face value, at least in terms of the futures premium.

Whenever a trader opts to buy or sell a futures contract, one is incurring the exchange’s solvency risk. 

Even though it is possible to deposit a smaller amount and leverage the position, the margin is unlikely to be recovered if the exchange is hacked or suffers unexpected losses.

Therefore, if one exchange’s futures premium differs from the majority, it is a very worrisome signal as it represents lack of trust.

BTC 3-month futures premium. Source: Skew

The chart above shows how the BitMEX BTC futures premium has lagged behind the competition. This effect has also occurred in the past, but there has never been a continuous 5% difference.

In normal situations, this would be considered an arbitrage opportunity. Savvy traders would buy BitMEX’s cheaper contracts and simultaneously sell it using another venue.

What should have been a regular trading movement escalated to a situation where futures contract buyers are unwilling to participate no matter how much cheaper BitMEX’s contracts are. This is primarily because traders are worried about solvency risks.

This price action is a self-fulfilling prophecy, where the lack of participants drives liquidity away, increasing withdrawals, and ultimately causes BitMEX’s pricing to decouple from other major exchanges.

This negative spiral can happen even if one excludes the horrific scenarios of BitMEX funds being seized by government agencies, or worse.

Will BitMEX find its second wind?

Bitcoin futures volume by exchange

Bitcoin futures volume by exchange. Source: Digital Assets Data

Therefore, BitMEX’s dismissal can happen regardless of its futures open interest and trading volumes. The longer its premiums stay below competition, the less credible the exchange will be in the eyes of investors. 

This cycle will likely lead to more investors pulling their funds and permanently closing their accounts at BitMEX. There is also the possibility that these departures will cause a short-term negative price swing.

To conclude, investors must not overlook these serious issues simply because BitMEX is honoring withdrawals or maintaining its current share of the market. Traders tend to overvalue volume and open interest metrics, but both can be easily inflated. 

The futures premium, on the other hand, is very expensive and difficult to manipulate.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.





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Bitcoin

Bad call? Bitfinex bears closed a block of Bitcoin shorts before the drop below $32K

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Bitcoin price is still in a rut, trading near $33,000 and trapped in a downtrend that just seems to get worse with the passing of each day. As the price slumps, analysts have consulted with several technical and on-chain metrics to explain the price collapse, but none of these have picked up on the exact reason. 

One area of interest has been the sharp rise in short positions at Bitfinex in the past week. Traders are placing exaggerated importance on these Bitcoin (BTC) margin shorts as if they are predictors of the current market crash. Still, as Cointelegraph previously reported, analysts forget that Bitcoin margin longs are usually much larger.

On June 18, longs outnumbered Bitfinex shorts by at least 22,800 BTC, but 87% of the short positions were closed before June 22. Currently, margin longs are 43,850 BTC higher than the amount shorted.

While those shorts are usually savvy traders, it is unlikely that they knew in advance that Chinese banks would prevent their clients from engaging in activities involving crypto trading or mining.

More importantly, these bearish positions were built while MicroStrategy was buying $500 million in Bitcoin after a successful senior secured note private offer. To make things worse, Michael Saylor’s business intelligence firm announced the intention to raise another $1 billion by selling stocks to buy Bitcoin.

Let’s take a look at how these courageous shorts fared.

Bitfinex margin shorts (blue) vs. Bitcoin price in USD (orange). Source: TradingView

On June 6, shorts increased from 1,380 to 6,700 at an average price of $36,150. Three days later, another 12,180 shorts were added when Bitcoin was trading at $37,050. Lastly, between June 14 and 15, shorts increased 6,000 to a 25,000 peak while Bitcoin averaged $40,100.

By looking at the Bitcoin prices when those short position increases took place, it is reasonable to assume that the 23,500 contract increase (green circles) had an average price of $37,625.

Related: Traders search for bearish signals after Bitcoin futures enter backwardation

Traders closed positions before BTC crashed bel$32,000

These short positions were steadily closed over the past three days when Bitcoin was already trading below $37,000. However, 17,000 short contracts had already been closed by the time the price plunged below $33,500. Therefore, it is implausible that the average price was below $34,500.

No one would complain about gaining 8%, shorting the market to generate a $73 million profit. However, it is essential to note that on June 16, when Bitcoin reached $40,400, these shorts were underwater by $65 million.

This analysis shows how even highly professional traders can go deep underwater. There’s no way to know if this trade would have been profitable had the crackdown on China not aggravated Bitcoin price or if MicroStrategy managed to raise the $1 billion before the price drop.

If anyone still believes in market manipulation, at least there’s comfort in knowing that pro traders can face drastic losses as well. However, unlike us mortals, whales have deep pockets and patience to withhold even the most rigorous thunderstorms.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.