on the crypto
Two back-to-back crashes halved Bitcoin's price in the middle of last week. The driving force behind the fall was the collapse of the economy due to the coronavirus pandemic. But the collapse in prices has been amplified by other factors, and the cryptocurrency investment company Multicapital has tried to explain what they are.
The fragile structure of the crypto market
Basically, the company points the finger at the fragile structure of the cryptocurrency market. If it had remained intact, researchers say, Bitcoin would not have collapsed so easily.
"Bitcoin and Ethereum networks - in their current forms - cannot operate on a global scale," said Samani co-founder of the company, "during times of crisis, they become so congested that the referees cannot keep the prices aligned between the different regions, causing huge displacements on individual exchanges ".
This means that since the Bitcoin network may perform poorly during times of high usage, it may be difficult to move Bitcoin between exchanges. As a result, large concentrations of trading operations are achieved in a few exchanges (silos) - with small pools of liquidity - with consequent wild price fluctuations.
"As prices between exchanges diverged significantly, the arbitrators were unable to deposit BTC on BitMEX to align the prices," said Samani.
The closure of BitMEX for maintenance has cushioned the blow
The Bitcoin futures exchange on BitMEX was one of the key trading silos. In just one day, $ 750 million in long positions - due to traders betting that Bitcoin's price would go up - were liquidated at the time the prices went down.
During this event, BitMEX suffered a DDoS attack and went down for maintenance procedures. This coincidence may have saved the day. “At one point, there were only $ 20 million of offers left on the entire BitMEX order book and over $ 200 million in long positions to be settled.
This means that BTC's price could have plummeted quickly to $ 0 if BitMEX hadn't stopped due to maintenance, "wrote Samani, adding," Given BitMEX's central position in the crypto market structure, this price change could have spread to all other BTC trading venues. "
The effect of Bitcoin miners
Bitcoin miners were also affected by the price. When the price of quotation went down, the miners shut down their cars. This sudden drop in the hash rate - calculating the mining of new bitcoins - led to new blocks that took longer.
“Some miners shut down their plants after the first fall. The situation worsened even in the second phase, "said Samani. This has made it increasingly difficult to send cryptocurrencies between exchanges, making the silos bigger and the drop even steeper.
“The most important thing to keep in mind is that the cryptocurrency market infrastructure is still immature. There is a lot of room for improvement in many aspects and therefore many opportunities to invest in, "he said.