Black swan arrives, the crypto asset market is tragically bloodied
Bitcoin price halved in a single day, the market value evaporated by 100 billion US dollars
March 12, 2020 will be an unforgettable day in the history of cryptocurrencies. An unprecedented black swan incident has blood-washed the entire crypto asset market. Within 24 hours, the overall market value of the crypto asset market has dropped from US $ 220 billion to a minimum of US $ 119 billion, with a maximum decline of nearly 50%. Coinbase data shows that the price of bitcoin fell from a maximum of 7,969 US dollars to a minimum of 3,858 US dollars from March 12 to March 13. Within 7 days, the maximum drop was 38.81%.
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Figure 1 BTC Price Trend Source: Tradingview
The total futures short positions in the entire network reached 3.939 billion US dollars in the past 24 hours, and the long positions of BitMEX reached US $ 863 million on March 12, a record high for the year. The sharp sell-off caused a 38% reduction in bitcoin contract holdings, and the bulls were brutally washed.
Figure 2 BitMEX liquidation source: SKEW
Figure 3 Cumulative BTC contract positions Source: SKEW
A number of new historical high data prove that the scale and impact of this crypto asset financial crisis is unprecedented and far-reaching. The Bitcoin slump this time is likely to trigger a "crypto asset mining disaster", leading to a major reshuffle in the mining industry. According to the data from the poolin mining pool, except for a few new mining machine series such as the Ant mining machine S17 and S19 and the Shenma mining machine M30 and M31, most of the mining machines have approached or fallen below the shutdown price, but it is worth thanking What's more, the actual decline of Bitcoin's entire network computing power in the past 24 hours is still less than 14%, and it will not have any impact on the security of Bitcoin's entire network in the short term.
Figure 4 Bitcoin's entire network hash power and hash price, woobull.com
ETH dives in succession, DeFi queues up
At the same time, there has been an unprecedented storm in the application field of crypto assets. According to the famous DeFi data tracking website DeFi Pulse, the total locked-in value of DeFi on Ethereum has fallen from 1 billion US dollars to about 600 million US dollars in the past 7 days, and its decline in 24 hours reached a record high of 33%. Decentralized mortgage lending platforms, including MakerDAO and Compound, have undergone large-scale liquidation, with settlement volumes exceeding US $ 10 million and US $ 6 million, respectively.
Figure 5 DeFi network clearing, debank.com
Among them, MakerDAO, a well-known mortgage lending platform with a market share of 60% in the DeFi field, has lost more than 30% of its total locked market value in the past 24 hours, falling below a large number of loan mortgage thresholds, leading to large-scale liquidation and forcing MakerDAO had to auction the governance token MKR to repay more than 4 million US dollars of non-performing debt (caused by the partial mortgage of ETH at the price of 0 DAI during the actual liquidation). The Black Swan incident fully reflects the risks of DeFi that deserve to be re-examined. The reason is that if the centralized financial system has a market crash, the decentralized financial system (DeFi) will be dragged down by network congestion and slow update of oracle data. This will trigger a large-scale "queuing out of positions and unable to clear in time" phenomenon, which may indirectly increase the degree of investor losses.
Figure 6 DeFi data on Ethereum, defipulse.com
Pulling cocoons, analyzing the "serial plunge" puzzle in all dimensions
Global assets plunge multiple times, no eggs under the nest
Looking at the global macro assets, Bitcoin's plunge is not alone. In this tragic decline in crypto assets, the global macroeconomic environment is facing the severe impact of the new crown epidemic and the dual impact of a sharp drop in international crude oil prices. As a result, the equity markets of major global economies have also fallen sharply. At present, the VIX index, which measures the degree of investor panic, has reached an all-time high, exceeding the historical high of the day when Lehman Brothers Bank collapsed during the 2008 financial crisis.
Figure 7 VIX Index, Investor Panic Index, Source: BlockVC Research
Affected by the two major factors of the COVID-2019 epidemic and the plunge in crude oil, US stocks have experienced two blowouts in the past two weeks. The main stock index has fallen by nearly 30%. European stock markets have also suffered violent losses. The second meltdown of U.S. stocks has allowed Dan Dingfu, Buffett, to bluntly "see you forever", not to mention other institutional investors with less senior qualifications. After the market recently entered a downward cycle, Bitcoin began to show a strong correlation with US stocks. Bitcoin's risky asset attributes are on the verge of a major impact on the global economy, and they have not been able to show the nature of hedging as in the past, acting as a safe box for the world economy and finance.
Figure 8 Stock market performance of major global economies in the past four months, Source: Wind
Figure 9 Correlation between Bitcoin and U.S. stock trends, Source: BlockVC Research
Crypto industry has high leverage, portfolio risks rise along the way
In the past three years, one of the fastest growing directions in the digital currency market is digital currency lending, including off-site mortgage lending, on-site leveraged spot trading on exchanges, and decentralized lending in DeFi. According to Bloomberg, the market size of OTC lending, Genesis Capital, the largest player in the market, has exceeded $ 1.5 billion in the fourth quarter of 2019, and the size of the entire lending market has exceeded $ 5 billion.
Each of the over-the-counter lending giants, including BlockFi, Bitgo, Babel, Matrixport, and RenrenBit, has a loan balance of hundreds of millions of dollars. The main flow of these loans is for miners who bet on Bitcoin to be halved, which is used for mining. Machine purchase and daily operating expenses. Mining machine manufacturers in the digital asset issuance sector have previously sold mining machine futures worth more than 20 billion yuan in 2019, and the leverage ratio of miners is already high.
Figure 10 PayPal Finance's New Loans and Bitcoin Price Trend Source: PayPal Financial Annual Report
The exchange's on-site lending market is more flexible, and the turbulent trading users also appear enthusiastic. When the price of bitcoin hits a high of $ 10,500 during the year, the USDT lending balance on the head exchange has all been exhausted. Leverage reached its highest point. Taking BUSD as an example, only transactions are used as a single use scenario. However, in the past few months, the circulation has rapidly exceeded 100 million US dollars, and the transaction volume has increased by dozens of times. The rapid expansion of the BUSD market value reflects the enthusiasm of USDT borrowing inside the trading platform from the side.
Figure 11 BUSD issuance and trading volume in the past month, source: Coinmarketcap
Decentralized finance, or DeFi, is gradually known to everyone in 2019, but the size of the stock market has already reached hundreds of millions of dollars. DeFi projects including MakerDao, Compound, and Synthetix have been established through the pledge of digital assets. In its own lending market, credit is accelerating through decentralization.
Figure 12 Pledge value of DeFi on Ethereum, source: skew
The above-mentioned many credit channels have increased the leverage ratio of the entire currency circle in the next step of the "halving" concept, laying a hidden danger for the subsequent plunge of the market. It is also because of the increase in the leverage ratio of the currency circle. It now seems that the mainstream currency market in January-February this year is actually boosted by the amount of funds in the market and leveraged by the increase of leverage inside and outside the market, from institutions to retail traders. The reluctance to sell is obvious, and external incremental funds have not increased significantly. Therefore, the mainstream coin market with many halving concepts has achieved a nearly double increase in nearly one and a half months, and the market wealth effect is obvious. On the way up, he did not experience a decent correction but has been accelerating. This also caused the market to gradually build up after February 20, and eventually fell sharply.
Falling off the cliff: Investors tragically "deleverage"
In the month after the Bitcoin price hit $ 10,500, it did not continue to make new highs, but turned around. The decline in this period may be due to many reasons, including the profitability of secondary market traders, and the miners ’early hedges. Confirmation and early profitable appearance of giant whale, resonance of the financial market sell-off caused by the global spread of COVID-2019, etc. When Bitcoin was driven by multiple factors, it reached a key price position-the previous low point of Bitcoin price $ 6,700, that is, when a large number of miners' borrowing and pledge warning lines are near this price, as long as some giant whales profit from this price or leave the market, they will become the last straw to overwhelm the camel. Since then, once the price of bitcoin has fallen below $ 6,500, there will be a large number of strong liquidation orders. The end result is a series of repeated positions that have repeatedly repeated in the past financial markets, and they are staged vigorously in the digital currency market.
Figure 13 USDT OTC Discount Premium Index Source: Chainext
After huge fluctuations in the market price, the liquidity of the USDT OTC market dried up, and the overall premium rate of USDT reached more than 5% on the 12th. Delays in OTC deposits have hindered the entry of funds. The failure of margin traders to replenish margin in a timely manner has once again exacerbated the phenomenon of short positions in the futures market.
Because the digital currency market does not have a central bank-like institution to rescue the market, and there is no fuse mechanism similar to the US stock market to block the continuous decline of the market for a short time, the price will naturally move to the direction of the least resistance, only when the price falls sufficiently low, Only enough people who are willing to buy bitcoin and bear the risk of continuing to fall, the market can bottom out when the buying and selling power reverses to create a new equilibrium, which is the hard landing we often hear.
The development of the digital currency market has been at the cost of abandoning part of the risk control and compliance supervision, so high-leveraged spot products and derivatives have greatly promoted transaction volume and brought a lot of liquidity risks. Off-market mortgages seem to have strict risk control. When the range of risk control behavior is too narrow, it actually exceeds the tolerance of the risk control model. A completely price-based risk control strategy is incomplete, because the market at a specific time and price liquidity is not a certain value, and when unpublished market data resonates unintentionally, the intensity of generation will be beyond everyone's imagination.
Learn from history and see the future from the past
The slump in digital assets has repeatedly repeated in the development history of the entire financial market. There are far from the U.S. stock giants caused by the Great Recession in 1929. The recent ones are the global financial crisis in 2008 and the 15-year A-share disaster. Good understanding of the impact of liquidity on the market.
In the United States in 1929, the U.S. dollar was still the gold standard anchored with gold. The weak economy was superimposed on the Fed's austerity policy, and US stocks under high leverage opened a plunge mode. At that time, US stocks generally implemented margin trading, with leverage as high as 10-20 times. When brokers were unable to raise funds in the market and customers were unable to replenish margin, the decline turned into a stampede. Strongly closed positions have led to continued declines in prices, falling prices have led to more strong closes, and serial bursts have led to a market-like plunge. With the development of time, the simple decline of the stock market in the early stage slowly induced more external influences. The failure of bankrupt brokers to repay their liabilities led to bad banks, the market credit system failed, and more funds were locked up. The liquidity of the market is getting worse and worse, resulting in the inability of companies to raise funds, the complete collapse of the economy, and finally the Great Depression that lasted for several years. The Dow Jones Index fell from its highest point by 90%.
Figure 14 1928-1933 Dow Jones Index Price Trend Source: macrotrends
The 2008 financial crisis was the most influential in the world. The decline in housing prices caused by mortgage defaults triggered the adjustment of the real estate market, while the decline in housing prices caused more defaults, and another typical series of sudden collapses. The liquidity is worse, so the crash is more severe. At that time, the largest banks in the United States held a large number of mortgage-related mortgage securities ABS. In fact, the actual value of these mortgage securities has been greatly reduced due to falling house prices. Everyone wants to throw away these "toxic assets", but the market No one took the order. So in a short period of time, the market prices of these securities plummeted, causing large-scale investment banks with leverages up to dozens of times to have technical bankruptcies. The most important credit lending in the financial market is completely frozen. The prices of all assets that still have liquidity have fallen to freezing point. Finally, the market ’s liquidity was gradually restored by relying on the Federal Reserve ’s QE to purchase “toxic assets”. The old shop went bankrupt forever.
Figure 15 S & P 500 Price Trend from 2007 to 2009 Source: macrotrends
And the latest serial plunge in the financial market came from A shares in 2015, which is also the most impressive "thousand share limit" for everyone. The bull market of A shares driven by a large amount of leveraged financing has reached the extreme value of historical valuation. Sudden deleveraging has caused a large number of passive selling to cause the stock price to fall rapidly, and the story of serial explosions has repeated itself. Stocks with valuations up to hundreds or thousands of times have become toxic assets. Everyone is selling, but there are not many buying orders. Under the A-share limit limit system, all stocks are forced to flatten as soon as the market opens. A sell order for a position seals the price of the limit stop. The special limit trading system actually helped to increase the severity of the decline, because there are too many stocks accumulated on the limit, and it cannot be sold immediately after buying and it is likely to continue to limit the next day, so there is no People dare to take over these stocks. In fact, the same as the CDO during the 2008 financial crisis, it led to a credit crisis in the market. In the end, the market was restored by actively purchasing toxic assets by releasing liquidity.
Figure 16 2014-2015 Shanghai Stock Index Price Trend Source: macrotrends
It is not uncommon to have a series of stomping in the financial market. It happens when several basic conditions are met. When high leverage, deteriorating fundamentals, and more than expected price declines occur at the same time, the market is not far from the stomping. This time, the crisis of the digital currency market is exactly the same as the financial crisis mentioned above. In traditional financial markets, there are central bank departments as the ultimate liquidity provider to expand the money supply, and regulatory agencies such as the Securities Regulatory Commission have set market fluctuation limits and fuse mechanisms, but the digital asset industry is still in the early stages of development. In the absence of regulatory links, and many risk control mechanisms are still immature, the industry can only achieve long-term development if it clears excessively high leverage and restores market order.
The new cycle of "de-leveraging" begins, and the market is in urgent need of rest
After the tragic market downturn, we still need to make clear that the fundamental value logic of crypto assets carried by Bitcoin and blockchain technology has not been substantially affected in this round of decline. It is undeniable that since the birth of digital assets such as Bitcoin, it has been embraced by many speculators because of its huge volatility, so that the saying that "the largest application of blockchain technology is currency speculation" has been widely popular. Today, when the market has been hit hard, we should clearly realize that it is not the first time that Bitcoin has experienced such a tragic decline in the eleven years since its birth. Each such decline has not killed Bitcoin, but has made Bitcoin stronger. ; With the help of distributed computing and development, smart contract platforms such as Ethereum have opened up a huge ecosystem of their own in just a few years of events. Tens of thousands of developers and builders have used hundreds of millions of lines of code to make " "Global settlement layer network" has begun to take shape; the issuance and trading of digital assets in China and the United States and around the world have spawned a number of independent companies that have been listed or valued at billions of dollars, including Bitmain, Canaan Technology, and Coinbase. For the corner animal companies, China is also an important breakthrough in the independent innovation of core technology. The cornerstones of all these industries have not been changed by the recent two days of slump. The secondary market has changed treacherous but there will always be a day when rationality is restored. The true value of Bitcoin and digital assets will eventually converge with the market price, presenting in all In front of investors and practitioners.
As investors return to rationality and market order is restored, in order to avoid the recurrence of market chaos and to contain hidden asymmetric risks in the industry, it is imperative for the industry to deleverage and ecological optimization.
At the exchange level, BlockVC calls for:
● Promote the gradual transition of spot leveraged transactions in digital assets to futures contract derivatives transactions, and provide users with clear and clear guidance on market selection, and avoid leveraged transactions to excessively affect spot index prices;
● Limit the leverage multiples provided by digital asset futures contract transactions and spot leveraged transactions, and establish certain thresholds for investors to enter into leveraged transactions;
● In the form of setting up derivatives such as ETFs, through professional market makers and trading teams to use spot as the underlying asset for product issuance, thereby avoiding huge fluctuations in the spot market and providing investors with rich investment targets.
● Promote the further improvement of the digital asset options trading market, reduce the overall market risk exposure, and make the yield curve more flexible;
● Carry out risk classification and market assessment for different investment products to promote market stratification.
For the majority of industry practitioners, how to survive and develop under the new "de-leveraging" cycle, BlockVC provides the following suggestions:
● Quantitative team
According to the experience of the two black swan incidents in mid-November 2018 and March 12-13, 2020, the price fluctuation range and speed of the crypto asset market are much higher than any market, so risk management and leverage management must be every Quantifying the most important task of the team, followed by the pursuit of profitability. The counter-trend grid anti-trend strategy has been proven several times that it will eventually fail in the crypto asset trading market. In a trading market with such a large volatility, trend following is the only way to truly realize stable profits. Of course, whether it is a trend-following or market-neutral arbitrage strategy, careful use of leverage will be the foundation for long-lasting prosperity.
Because there are no barriers to entry for transactions and investments in the crypto asset industry, both individuals and institutional investors should actively learn and master relevant product and financial knowledge before entering the market, strengthen risk awareness, and cultivate financial literacy to improve themselves. Survivability and profitability in the market. For institutional investors, the rational allocation of capital risks is achieved through the comprehensive allocation of trading tools with different risk characteristics such as actively managing funds, quantitative strategies and arbitrage strategies; in contrast, individual investors should maintain Reasonably assess your own risk tolerance, understand the reasonable allocation of funds, and be able to improve investment levels through continuous learning.
● Ore practitioners
For miners participating in Bitcoin mining, because mining is an industry with high up-front investment costs, long capital withdrawal cycles, and many influencing factors, it is necessary to clearly distinguish between mining and investment transactions when deciding to participate in mining. The essential difference is that you should comprehensively evaluate the cash flow status, mining machine upgrade cycle, and bitcoin market performance, reasonably balance current and future revenue expectations, control the leverage ratio, and master the necessary hedging tools and strategies to avoid the entire recovery. Market risk due to currency price fluctuations this week.
https://cointelegraph.com/news/genesis-crypto-lending-firm-hits-new-record-in-loan-originations-in-q4-2019 https://www.bloomberg.com/news/articles/2019 -10-29 / another-credit-bubble-grows-the-5-billion-crypto-loan-market