What Went Down? Crypto Carnage Wipes Out August Progress, Revealing Exchanges Remain an Astronomical Failure
“Number go up," and “number go down.” A feedback loop of liquidations sends the prices crashing, but the best course of action is to buy the huge dip as that has “never not” worked.
This Tuesday, crypto markets took a big hit that saw Bitcoin losing more than $10,000 of its value, touching $42,000 after making it to $53k earlier in the same day.
The crash wiped out all the progress made in the past month.
This crypto carnage also showed that crypto exchanges remain a big-time failure. While Coinbase went down showing latent market data and a “404” error on order entry, Binance.US was completely broken. Gemini was lagging before the complete shutdown, and orders on Kraken failed while FTX.US was mostly working but implemented aggressive rate limiting.
“CME – broker refused to execute order due to delay reaction to limit down,” noted crypto market maker @IamNomad.
All the exchanges are broken from people trying to get in and funding is neg pretty sure wgmi
— The Land Before CMS (@cmsholdings) September 7, 2021
While the crypto market is growing rapidly, now worth more than $2 trillion, crypto exchanges are struggling to keep up with the rising demand and continue to not work during bouts of volatility, which is common for the market.
What Caused This?
For those looking for a reason for a cause behind this carnage, this flash crash could be attributed to the historic day for Bitcoin when BTC was introduced as legal tender in El Salvador, turning out to be a sell the news event. However, El Salvador took advantage of the situation and bought the dip.
“Social media platforms were very cautious over the weekend that a plunge could occur following El Salvador’s big day,” Edward Moya, senior market analyst at Oanda Corp, wrote in a note. Some investors likely bought in anticipation of the event and then moved to “sell the fact,” he said.
If you think about it, it's stunning to see a President posting on Twitter his country just bought the dip. A historical moment. https://t.co/2ujEQhkt4T
— Alex Krüger (@krugermacro) September 7, 2021
In an interview with Bloomberg, billionaire Mike Novogratz said this sudden plunge in Bitcoin which was “a little air being popped out of the balloon,” was the consequence of retail investors who got “too excited” by the recent interest from institutions and got too long on leverage for a good reason.
“There is a realization that this is a technology and no investor wants to miss the next internet. This is the next internet,” he said adding, people realize that Bitcoin is more than just a hedge against bad monetary fiscal policy but “more importantly, it’s Web 3.0. It’s the internet of value transfer.”
So, as always, leverage remains the culprit, which had started trending up, although, unlike the last time, there was nowhere near the same heightened amount of greed and funding rate in the market.
“A negative feedback loop of liquidations seems to be the primary cause, as the market punished over-leveraged apes,” noted Delphi Digital.
The ratio of perpetual swaps open interest to Bitcoin’s market cap had been rising as too many people anticipated new all-time highs. This suggests high leverage and trend following.
Values of over 1.55% OI/MC have anticipated mean reversion in prices four times this year. pic.twitter.com/rwyDX3wlfS
— IntoTheBlock (@intotheblock) September 7, 2021
According to Sam Trabucco, CEO at Alameda Research, the set-up has been the same as every time which involves, futures at really high premia suggesting aggressive buying, OIs going up suggesting the buyers are opening positions, and the number going up means there’s net buying.
But “number go up” means the next stage of the set-up is “number go down.”
As prices crashed, for whatever reason, “some of those aggressive net buyers who bought near the top get liquidated, and then more of them get liquidated…like clockwork.”
So, “the best and most predictably great thing is to buy the HUGE dip — buying right here has just never not been awesome.”
“History repeats again, and I've got a feeling we've not seen the last of it,” said Trabucco, and as has been aptly saying, “Those who do not learn from history are doomed to repeat it.”