Babbitt Column | What Can I Use to Save You

First, serial bursts

Actually, it has been a long time to think about the topic of "serial burst", but it has not been written. As a result, today's Bitcoin has fallen by 20% on a historic day, and the market is mourned. It is said that the shortfall funds exceeded 10 billion. If the halving will bring about a bull market as everyone said, then this 10 billion funds will basically fall before dawn, just like the 480,000 brothers of the year, this is a very unfortunate thing.

If you think that this big drop in Bitcoin is just an accident, then we might as well adjust the time back to the night of September 25, 2019, half a year ago, and the bitcoin also fell sharply that night, although it only closed down about 13%. But the biggest drop was more than 20% at one time, and it was only within a few hours. The funds that were sold out that night were estimated to be in the tens of billions. Many small and medium-sized market currencies fell by more than 50% in a day.

Both times, I counted as a full journey.

This fall method is very scary, something that is hard to imagine in traditional financial markets. Why is there always a wave of slump in the digital currency market? Is this accidental or inevitable? Is it a small-probability event, or is there some underlying cause?

I personally think that this is not accidental, but inevitable! Not a small probability event, but one that will happen one after another! Because there is a very horrible reason behind this: serial bursts!


Serial short positions are nothing new. The word appeared a few years ago, when it appeared in the BTS bitcoin ecosystem. BitShares was the first project of BM, and it was also a star project of the year. It was once dubbed by the market as "BTS is the real bitcoin". It also wanted to create a brand new financial ecology. The core function of which was to mortgage BTS. Generate various assets, various stablecoins, and then the mortgaged assets can be further mortgaged, and then the mortgaged assets can continue to be mortgaged.

The advantage of this is that the utilization of funds is very efficient. If the market is good, the profits will be very considerable. BitShares has also relied on this feature for a long time, but BTS eventually slowly became indifferent. Although there are various reasons such as internal struggles in the community, there is a more important reason for technical aspects, which is serial sales.

Although the use of funds is very efficient when the market is good, but once the market goes in the opposite direction, and the decline is very deep, the system will encounter serial bursts. The forced closure of a small position will cause a large one. A position is forcibly closed, and a large position is forcibly closed, which will result in a larger position being forcibly closed, which will cause a chain reaction that will cause a very deep drop.

After a series of short positions in this way, the market's confidence in it has been greatly affected.

This type of serial short position is the same as the serial short position we encountered today. Today, many people like to play contracts, and the leverage is still very high, especially some of the heavier positions also like to play contracts, maybe their contract multiples It is relatively low, such as 2-3 times, but once Bitcoin has fallen too much, even 2-3 times leverage will be closed at this time. After a large single position is taken over by the exchange's strong liquidation mechanism, it will be immediately sold in the market regardless of cost, and this selloff will cause the market to fall further in a short period of time, resulting in a series of short positions.

Third, the reasons for serial short positions

Traditional capital markets also have a lot of reinvested mortgage loans. Why haven't they encountered serial liquidation?

1.The volatility of digital currencies

Compared with the traditional capital market, the first feature of digital currency is that it is too volatile, and there are no protection measures such as limit changes.

Traditional stocks have fallen a lot by 3%, but bitcoin, as the leader of digital currency, can fall as much as 20% in one day, and other small and medium-cap market currencies can fall as much as 50% in one day. This kind of fluctuation It's no surprise that sex has caused a series of short positions.

The volatility rate is too high. There is not much solution to this problem. It can only wait for the entire digital currency to slowly develop and grow. The number of participating currencies is increasing. The number of participants is increasing. The overall market value is increasing. The higher the volatility will naturally decrease.

Of course, there are actually some simple solutions. For example, at present, contracts are only opened for the top three and five projects with market capitalization, but for the currency circle without regulatory constraints, this situation is very difficult to happen, and no exchange will talk to itself. The profits are not going through, they will only think that there are too few types of contracts they have opened.

2.The volume of the digital currency market is too small

The volume of the digital currency market is very small, which is also the reason for the consecutive market bursts of the entire market. Of course, this market value is directly related to the volatility mentioned above. Because the volume is small, the volatility is large;

So far, the total market value of the entire digital currency market adds up to the market value of a large and medium-sized traditional listed company, which is a little far behind the giant companies such as Apple, with a very small volume. If the entire digital currency market is regarded as a medium-sized and large-scale listed company, it is not very difficult for capitalists to control such a company alone.

3.The currency standard of the digital currency market

In addition to market value and volatility, digital currencies have another feature: futures in traditional financial markets are settled in fiat currencies, that is, settled in stable currencies; but in the digital currency market, due to compliance considerations, many contracts are The currency standard is used. For example, if you make a BTCUSDT contract, then you actually settle with BTC.

In this case, when the market goes up, you earn BTC, but once the market goes down, your loss is priced in BTC. This is actually equivalent to adding another leverage. This is a digital currency. Where the market is different from the traditional financial market, the leverage itself is not low, and once the leverage is added, the volatility is even higher.

4. The digital currency market is highly leveraged and lacks regulation

In addition to the reasons mentioned above, there are many varieties in the digital currency market. In addition to the spot, we also have futures, contracts, options, and so on. The maximum leverage is 125 times. You can think of it this way, a listed company with a small market value not only has stocks, but also the underlyings of related futures and options, and it can also accept 125 times the leverage, then this is not equivalent to sending a signal to those attackers: Attack me! I have the knife ready for you "Is it the same?

This is not over. The most important thing is the lack of supervision of the entire market. Those capital crocodile who want to profit from it can make a big swing and "reasonably and legally" use the existing rules to use these financial instruments for profit. Together with these capital predators, one side provides funds and one side provides information. The information includes the customer's specific positions and specific points. In this way, the capital crocodile can calculate the funds required for liquidation in advance, so as to complete the precise sniping, and then get back from the very low price to complete this set of "precision" operations.

If one thing is profitable and the profit is high, then someone will definitely do it!

4. Can Defi Finance solve the problem of serial short positions?

Then some people will ask, if this situation often occurs in centralized exchanges, will the problem be alleviated after the development of Defi Finance and decentralized exchanges?

The emergence of Defi Finance can indeed solve some problems. First of all, it does not belong to a centralized organization. All transaction data is on the chain. Buyers and sellers share the same information. There is no such thing as internal news. Everyone also faces Following the same rules, these rules are public and transparent. In these respects, all parties can indeed be on the same starting line, and everyone can play this game based on their financial strength. At the same time, it also reduces a lot of manual operations, which reduces the factors of fraud and artificial manipulation.

However, Defi Finance cannot solve the fundamental problem. Although Defi Finance has many forms, most of its bottom-line businesses are derived from mortgage lending. The problem is here: when your core is mortgage lending, then you will still face this problem. If one day a sudden sharp decline, Bitcoin falls by 20%, and a single day falls by 20 ~ 30%, then It will cause some large orders to be closed, and the large orders may cause subsequent serial positions, which is not what Defi Financial can solve.

The root of the serial short position problem lies in the lack of transaction depth. Only by truly solving the problem of transaction depth can the serial short position problem be solved . The trading depth must be so deep that when the market drops sharply, multiple orders in the market have the ability to digest these orders that trigger the liquidation mechanism and are forcibly closed by the system.

Of course, if Defi Finance develops, the transaction depth gradually develops, and at the same time, with the improvement of some systems, it may be able to suppress the serial liquidation, but before the problem of transaction depth is not resolved, it It also faces the problem of serial short positions.

Solving the problem of transaction depth requires a large amount of capital to enter; a large amount of capital to enter requires the public to have a good understanding and acceptance of digital currencies; for the public to accept digital currencies, it needs to be recognized at the national level; and these all take time, not one Within two days, it can be solved by turning centralization into decentralization.

Fifth, what else can we do to solve serial short positions?

In addition to the above methods, we can actually learn from the traditional capital market gameplay to alleviate the problem of serial short positions, such as the trading rules of the futures market in traditional finance.

In the traditional financial futures market, if you want to open a futures account, you must pass the exam. There are specific requirements for opening certain specific futures category accounts. If you want to go short and want to open margin trading, in addition to the exam, you must To have a market value of more than 500,000, you need at least 6 months of trading experience; if you want to participate in options trading, you need more qualifications. Because the principles behind these financial products are relatively complicated, and they are inherently leveraged, they are very risky and require a deep investment skill to master them. If they are not mastered well, they will not only hurt themselves but also the market. Impact. Even under the protection of such strict rules as traditional financial markets, the futures and options market often encounters large fluctuations, not to mention the completely unregulated niche market such as the digital currency market.

I believe that sooner or later we will also realize that the barriers to entry for investors who want digital currencies must be stricter. If you want to increase leverage, then you must provide corresponding qualifications, you must be a "qualified investor", you must have proof of assets and investment experience; if you want to use futures, options, then you must go through once The assessment can only be opened after passing the assessment; if you want to go short, you must also meet the corresponding conditions.

Not only for investors, but also for the exchanges, there are some qualification requirements and restrictions, as well as a rating mechanism, what kind of rating to achieve, how much risk margin to pay in order to be able to open a financial product with a certain permission, and the leverage multiple needs to be set Ceiling. Of course, all of this needs to be equal to the slow legalization and compliance of the entire industry, which will only be realized after the state has recognized the involvement of supervision.

Prior to that, serial short positions will continue to occur. This article is a small reminder for participants.