BitMEX is maintaining respectable liquidity and open interest but the exchange could still face a total client exodus.
For BitMEX, 2020 has been quite a rough year and from the look of things it’s only set to get worse.
The popular derivatives exchange is no longer as relevant and impactful
on crypto market price action as it was 2 years ago, but a significant
short-term price correlation among top exchanges has been proven
repeatedly.
A well-documented case occurred in May 2019, when a large sell order on Bitstamp caused a cascading $250 million liquidation on BitMEX.
The following month, a Coinbase exchange outage triggered a $1,400 Bitcoin (BTC) price nosedive, as reported by Cointelegraph. A well circulated report by Bitwise Asset Management clearly showed that the top exchanges traded "extremely tightly."
The
report detailed how top exchanges influence pricing suggested that
their movement is synchronized even when measured in milliseconds.
While BitMEX has denied the CFTC allegation
of operating an illegal derivatives exchange, the problem is markets
are not taking those words at face value, at least in terms of the
futures premium.
Whenever a trader opts to buy or sell a futures contract, one is incurring the exchange's solvency risk.
Even
though it is possible to deposit a smaller amount and leverage the
position, the margin is unlikely to be recovered if the exchange is
hacked or suffers unexpected losses.
Therefore, if one
exchange's futures premium differs from the majority, it is a very
worrisome signal as it represents lack of trust.
BTC 3-month futures premium. Source: Skew
The
chart above shows how the BitMEX BTC futures premium has lagged behind
the competition. This effect has also occurred in the past, but there
has never been a continuous 5% difference.
In normal
situations, this would be considered an arbitrage opportunity. Savvy
traders would buy BitMEX's cheaper contracts and simultaneously sell it
using another venue.
What should have been a regular
trading movement escalated to a situation where futures contract buyers
are unwilling to participate no matter how much cheaper BitMEX's
contracts are. This is primarily because traders are worried about
solvency risks.
This price action is a self-fulfilling
prophecy, where the lack of participants drives liquidity away,
increasing withdrawals, and ultimately causes BitMEX’s pricing to
decouple from other major exchanges.
This negative
spiral can happen even if one excludes the horrific scenarios of BitMEX
funds being seized by government agencies, or worse.
Will BitMEX find its second wind?
Bitcoin futures volume by exchange. Source: Digital Assets Data
Therefore,
BitMEX's dismissal can happen regardless of its futures open interest
and trading volumes. The longer its premiums stay below competition, the
less credible the exchange will be in the eyes of investors.
This
cycle will likely lead to more investors pulling their funds and
permanently closing their accounts at BitMEX. There is also the
possibility that these departures will cause a short-term negative price
swing.
To conclude, investors must not overlook these
serious issues simply because BitMEX is honoring withdrawals or
maintaining its current share of the market. Traders tend to overvalue
volume and open interest metrics, but both can be easily inflated.
The futures premium, on the other hand, is very expensive and difficult to manipulate.
source link : https://cointelegraph.com/news/lagging-bitcoin-futures-premium-shows-bitmex-is-losing-investor-trust
