Bitcoin

Lagging Bitcoin futures premium shows BitMEX is losing investor confidence

2020 has been a very difficult year for BitMEX and it looks like it is only going to get worse.

The popular futures exchange no longer so relevant and shocking in cryptocurrency market price action like 2 years ago, However, it has been shown several times that there is a significant short-term correlation between price and major exchanges.

One known case occurred in May 2019, When a large sell order at Bitstamp triggered a $ 250 million cascade sale on BitMEX.

Lagging Bitcoin futures premium shows BitMEX is losing investor confidence
Lagging Bitcoin futures premium shows BitMEX is losing investor confidence

The next month A Coinbase outage caused Bitcoin (BTC) prices to drop by $ 1,400, as reported by Cointelegraph. ONE Bitwise Asset Management report published clearly demonstrated that the major exchanges operated “extremely tight”.

The report detailed how major exchanges affect price. This suggests that its movement is synchronized even if it is measured in milliseconds.

While BitMEX denied the CFTC’s allegation of illegally operating a derivatives exchange, The problem is, the markets are not taking those words at face value, at least in terms of the futures premium.

When a trader buys or sells a futures contract, You bear the solvency risk of the stock market.

Although it is possible to deposit a smaller amount and take advantage of the position, Margin is unlikely to be restored if the stock market is hacked or unexpected losses occur.

If an exchange’s futures premium is different from most, it is a very worrying sign. because it represents a lack of trust.

BTC 3-month futures premium

3-month bitcoin futures premium. Source: Skew

The graph above shows how the BitMEX BTC futures premium lagged behind the competition. This effect has also occurred in the past, but there was never a continuous 5% difference.

In normal situations, this would be viewed as an arbitrage opportunity. The most knowledgeable traders would buy the cheapest BitMEX contracts and sell them elsewhere at the same time.

What should have been a regular trade move escalated into a situation futures buyers are unwilling to participate in, no matter how cheap BitMEX contracts are. This is mainly because traders are concerned about solvency risks.

This price action is a self-fulfilling prophecy, When the lack of participants affects liquidity, increases payouts and ultimately causes BitMEX prices to decouple from the other exchanges.

This negative spiral can even occur when dire scenarios like government agency seizure of BitMEX funds or worse are ruled out.

Will BitMEX find its second wind?

Bitcoin futures volume through exchange

Bitcoin futures volume through exchange. Source: Digital Assets Data

Therefore, BitMEX can terminate regardless of the open interest of its futures and trading volumes. The longer your premiums stay below the competition, the less credibility the stock market will have in the eyes of investors.

This cycle will likely last So that more investors can withdraw their money and permanently close their BitMEX accounts. There is also the possibility that These exits have a short-term negative effect on the price.

Finally, Investors shouldn’t overlook these serious issues just because BitMEX is rewarding payouts or maintaining its current market share. Traders tend to overestimate the volume and open interest metrics, but both can be easily inflated.

The futures premium, however it is very expensive and difficult to manipulate.

The views and opinions expressed here are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and business move is associated with risks. You must do your own research when making a decision.

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