Efficient Frontier
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Efficient Frontier

Perpetual Optimism: Bitcoin markets are bruised but not broken

This week we‘re focusing on the market’s recovery mode and and touch on how derivatives are dominating the crypto markets’ attention. We hope you find it informative and fun.

Bruised but not broken

While trading volumes are rising across the entire industry, derivatives dominance is growing rapidly:

March 12th-13th cleared out the high leverage from the Bitcoin markets, which are still liquid and operational (without need of any “medical attention” as is seen in the traditional markets). As a whole this is a healthy state of affairs.

But the cryptocurrency derivatives markets are still recovering from the most volatile day in their short history, and the keyword is recovering, not recovered:


The graphs below shows order book depth over the last 6 months for BitMEX, Binance and Deribit futures exchanges. These images show money that is ready to buy and sell Bitcoins in each exchange, depicting how much a large market order would instantaneously affect the price. The bigger the money’s effect, the less liquidity is present.

Above you can see the large drop in liquidity caused by the market breakdown on March 12th. Since, liquidity hasn’t returned to its previous levels. This could be due to 2 reasons A) Market makers expecting more volatility B)Damage to capital.

Altogether, this hints at a state of fear in the market (For more information see Skew.com’s monthly report).

Panic and infrastructure overload

The increased activity on exchanges during the crash slowed response time, creating more panic which increased the overloads. Not only were exchanges intermittently out-of-service during the peak of the crash, but trading and arbitrage bots were also shutting down. Some breakdowns of the markets are seen in the big gaps between exchanges, and the gap between contracts on March 12th and 13th.The lack of uniformity between the leading products seemed to have increased the disruption.

BTC perpetual on BitMEX VS BTC Perpetual on FTX

BTC perpetual VS BTC June 26th contract on BitMEX

Futures curve backwardation

Another sign of fear and pessimism in this aftermath is the June 26th Bitcoin contract trading below the perpetual contract prices in most days of the last month.

The last time Bitcoin futures were in prolonged backwardation was over a year ago, when Bitcoin was first recovering from its winter low of around $3,500, and traders were still feeling negative about Bitcoin’s price as it reached $5,000.
See the current state of the futures curve live here.

Exchange competition

It looks like March 12th influenced BitMEX in a way its competitors could only wish for.
Since that date, BitMEX has lost, for now, the symbolic leading position in Open Interest in Bitcoin perpetual futures contracts.

It’s hard to claim that another exchange would have held up better under the same amount of pressure. Nevertheless, BitMEX’s brief shut down during key moments of the market breakdown on March 12th affected some traders’ choice of venue.

Arcane Research’s report

Meanwhile, Binance Futures who began offering perpetual Bitcoin swaps last September, made headlines as it reached its highest daily volume to date, and is leading the futures exchange in volume, a metric that carries somewhat less weight then open interest or order book depth.

On April 14th BitMEX announced they are lowering their base maintenance margin for leveraged users’, meaning liquidating user’s accounts will be a little less likely to happen, and that the infamous BitMEX Insurance Fund will gain less Bitcoins.

Leverage replacing Altcoin action

Cryptocurrencies of all colors of the rainbow were profitable to list, low risk and offered higher trading fees for exchanges during the 2017 cryptocurrency bubble. As enthusiasm for Altcoins and tokens dwindled, professional leveraged exchanges such as BitMEX and Deribit kept drawing more customers. Bitcoin liquidity was still strong and leveraged trading offered excitement that was now lacking in the spot markets. Volumes and investment started shifting over 2018 and 2019 to the maturing Bitcoin derivatives market while big spot exchanges realized they could direct their large pool of users to their new futures products.

In February FTX wrote about this on their blog:
“Why were people taken by surprise by the derivatives boom over the last year for Bitcoin? “It just wasn’t obvious, because CoinMarketCap hadn’t — and as of writing this a year later still hasn’t — included derivatives. If you’d asked most people in crypto how much volume traded in derivatives, they’d have been too low by a factor of 10; and if you’d asked where it traded they would have been able to name only one venue — BitMEX. The lack of recognition that other derivatives platforms got was particularly surprising given that 2018 really turned out to be The Year of OKEx Futures. Both the highlight — EOS’s incredibly bull run in the spring — and the lowlight — the giant crypto crashes of the fall and BCH/BSV expiration shitshow of the winter — were driven by the Chinese futures platform quietly trading billions per day. Meanwhile, CoinMarketCap proudly advertised the suite of trans-mining exchanges at the top that were clearly not made for the long run.”

Right now the competition is stronger than ever, so we’re sure to keep updating on the interesting developments.

Thank you to our trading and research teams for assisting with this analysis.

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