Academy Industry Analysis Article

Bitcoin’s June 2 Flash Crash Made Some Exchanges Scramble — Here’s What Happened

2020.06.09 adamokex

Last week, the Bitcoin (BTC) price went on a roller coaster ride from the night of Monday June 1 until the afternoon of Tuesday June 2 (UTC time). It surged to a three-month high of $10,396, per OKEx’s BTC Index Price, before plunging by $800 in less than 24 hours — causing a loop of liquidations alongside a Coinbase outage

On June 1, the price of Bitcoin shot up from $9,450 to above $10,000, gaining eight percent. After the pump, the price made a correction and was changing hands between $10,050 and $10,200 — a very narrow range — over the next 10 hours. Around June 2, 2:45 PM UTC, the price suddenly plunged nearly $800 in ten minutes, dropping from $10,150 to below $9,400 while liquidating $347 million across derivatives exchanges in only one hour.

The sudden plunge left Bitcoin prices widely divergent on various derivatives exchanges. BitMEX was the most notable outlier, which had a perpetual swap contract with the lowest price of $8,600 during the volatile action. Perpetual swaps on other major exchanges once ranged as low as $9,232 to $9350, per ICO Analytics data.

bitcoin prices exchanges
The lowest levels across derivatives exchanges on June 2. Source: ICO Analytics

Why did Bitcoin’s price drop?

Retail traders FOMO’d in

From OKEx’s trading data, we also detected risk accumulating after the aforementioned pump. The BTC Long/Short ratio spiked to 1.76 from 1.19 in less than six hours — indicating that retail traders were chasing the rally for Fear of Missing Out (FOMO) on it. 

okex btc long/short ratio
OKEx BTC Long/Short Ratio – 5/29 6:00 a.m. to 6/5 6:00 a.m. (UTC). Source: OKEx

Moreover, the number of stablecoin Tether (USDT) transfers to exchanges spiked overnight and hit an all-time high of around 20,000, according to Glassnode data. Glassnode also pointed out on its Twitter that, “given that the inflow exchange volume did not significantly increase, this implies a large amount of small-sized Tether deposits.”

Premium and funding rates attracted arbitrageurs

The June-expired futures premium on major exchanges reached an annualized range of 26.78 to 41.92 percent on Tuesday morning, as per data from crypto lending company Babel. From OKEx’s BTC Quarterly Futures, we have seen the premium rise to $160 from $70. 

Since retail traders and investors started FOMO-ing in with high leverage, the funding rates across derivatives exchanges went crazy. All predicted funding rates went above 0.15 percent on Tuesday morning, according to aggregated derivative exchange data provider Bybt.

The high premium in futures and high funding rates in perpetual swaps attracted a lot of arbitrage traders, who stepped into short positions to take advantage of the price difference. 

Technical indicators warned of a reversal

After the huge pump on June 1, several technical indicators displayed risk alerts.

QCP Capital pointed out right after the pump on its Telegram broadcast that “We see this as a possible near-term top with multiple TD reversal signals in play -a weekly TD 9 (confirmed), a daily TD 13 (confirmed).” 

The TD 9/13 indicator tends to be accurate on higher time frames because it requires 13 candles to close within a certain structure.

Possible dump from an unknown BTC mining pool

CryptoRank detected that an unknown mining pool had moved a huge amount of BTC on June 2 — a total of 4,513 bitcoins (about $45 million). The same outflow from this mining pool on May 20 was in line with the price drop on May 20. 

Furthermore, CryptoQuant noted on its Twitter that whales had moved coins to some derivatives exchanges just a few hours before the dump.

Open Interest (OI) on OKEx also revealed possible crypto whale movements. OI increased from 640 million contracts (1 contract = $100) to 810 million contracts when Bitcoin’s price shot up to above $10,300. The price spike triggered a huge amount of short position liquidations on Monday night but OI did not drop. This indicates that some whales opened short positions at the top of the range when liquidation orders pushed the price up. 

Why was there such a wide price spread across perpetual swaps?

Then, on Tuesday afternoon (UTC), June 2, the price of Bitcoin suddenly crashed. While other BTC perpetual swaps fell to a price level near $9,300, the perpetual price on BitMEX plummeted to $8,600. 

A spread of -5.98 percent between BitMEX’s perpetual swaps and Coinbase’s BTC price was recorded by data provider Skew. A total amount of $96 million positions was liquidated on BitMEX in one hour. 

skew bitmex xbtusd coinbase btc-usd basis
BitMEX — Coinbase Basis. 6/1 – 6/4. Source: Skew

In its June 5 report, Arcane Research said the situation was caused by overextended leverage, which led to large positions getting automatically sold when the price drops:

“These sell orders went all the way down to $8,600 before all got filled. This cascade of liquidations is what resulted in the $1,000 deviation on BitMEX from other exchanges.”

A crypto derivatives product manager, who wishes to remain anonymous, told OKEx Insights: 

“Too many trailing stop loss orders and liquidations wiped out the liquidity in the order book, leading to a liquidation spiral. It wasn’t until $8,600 that orders were finally filled on BitMEX. After March 12, we noticed that the order book on BitMEX is not as deep as before — but it is not obvious in normal trading days.” 

Yu Qing from SkyLine Capital told OKEx Insights in comments: 

“A single very large liquidation could trigger a lot of small positions to go bust. This will lead to a liquidity drain and leave a long wick on the chart — but what price level could trigger a very large liquidation is more random.”

Looking into the BitMEX XBTUSD Liquidations chart, we can find a $10 million position getting liquidated at 14:46:46 UTC, followed by a series of liquidations. This $10 million liquidated position was the largest one across all exchanges on Tuesday. 

bitmex xbtusd liquidations
BitMEX XBTUSD Liquidations. 6/1 – 6/4. Source: Skew

Ongoing liquidity issues at BitMEX

All of the aforementioned comments point to one thing: BitMEX was facing a liquidity issue. 

According to CryptoDiffer, three other major derivatives exchanges — OKEx, Huobi and Binance — had about the same amount of liquidations as BitMEX on June 2. However, the perpetual swap price on these three exchanges were very similarly placed around $9,300. 

okex bitmex huobi binance ftx
Amount of liquidations by exchanges on June 2. Source: CryptoDiffer

Moreover, looking at the average bid/offer spread to trade $10 million of BitMEX perpetual swaps on June 2, liquidity on BitMEX dried out, multiplying the bid-ask spread by 40 times — a big spread from an average of 0.16 percent to 6.36 percent for a $10 million buy order.

BitMEX Perpetual Swap -— Tiered Price: $10 million($). Source: Skew

According to data provider Skew, daily trading volume on BitMEX fell significantly on March 14, two days after the price of Bitcoin plummeted 50 percent. Meanwhile, OKEx, Huobi and Binance began to outperform BitMEX in daily trading volume on the days that followed. 

btc futures aggregated daily volumes
BTC Futures — Aggregated Daily Volumes. Source: Skew

On June 8, for example, OKEx, Huobi and Binance traded $3.66 billion, $3.27 billion and $2.49 billion in futures in 24 hours, respectively. BitMEX traded $1.92 billion, as per Skew data. Though OI remained at a high level of $0.83 billion on BitMEX, its 24-hour trading volume is barely ranked in the top three. 

btc futures
Exchange 24h BTC Futures Volumes vs. Open Interest ($bn). Source: Skew

BitMEX’s declining trading volume is correlated to its poor performance during periods of extreme market volatility. 

During the events of March 12 to 13, Bitcoin’s flash crash triggered the most liquidations on crypto derivatives exchanges. The top cryptocurrency by market capitalization fell from $7,200 to sub $4,000. BitMEX interrupted trading for 25 minutes. At that time, the lowest trading price of perpetual swaps on BitMEX, Binance and OKEx was $3,596, $3,621 and $3,811, respectively. BitMEX was also trading at the lowest price across the exchanges. 

In an interview with Cointelegraph, the Founder and CEO of Celsius Network (CEL), Alex Mashinsky, said: 

“I think they lost the customers they had to liquidate in March during the flash crash. Also, many other exchanges now offer exactly the same product and have many other features BitMEX does not have so it is harder for BitMex to rebuild the customer base.”

Earlier this year, BitMEX experienced another liquidity issue on its Ripple (XRP) trading pair. The XRP/USD price on BitMEX quickly collapsed from $0.33 to $0.13 — a drop of nearly 60 percent — around 14:00 UTC on February 13. It recovered to $0.3277 within one minute.

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