Reviewing the most thrilling 24 hours in Bitcoin's history

This article was first published on March 14, 2020, on the Chain Catcher WeChat public account.

From March 12 at 12:00 to March 13 at 12:00, Bitcoin, the most influential cryptocurrency in the industry, experienced two significant crashes, with its price dropping from a high of $7,672 to a low of $3,800 (data from Huobi, the same below), a decline of 50.4%. This drop signifies that Bitcoin's price achieved a remarkably precise "halving" within these 24 hours.

Previously, Bitcoin's "halving market" was often regarded as a bullish trend stimulated by the halving of its supply. Although many have jokingly referred to the "halving market" as "price halving" with skepticism, the fact that Bitcoin truly emerged from the current poor market conditions still surprised the vast majority of investors.

1. The First Crash

The disastrous 24 hours began at 12:00 on March 12. Due to the rapid spread of the COVID-19 pandemic in Europe and the United States, the global financial markets had been gloomy for days. After several adjustments, Bitcoin's price had been fluctuating between $7,600 and $8,200 for the previous three days, but after 12:00 on the 12th, Bitcoin's price first fell below $7,600, breaking many investors' psychological expectations and entering a rapid decline channel, dropping to around $7,200 by 18:00.

At this point, Bitcoin's decline was still around 7%, a common occurrence in its history. However, after 18:00 that day, the market took a sharp turn downward, and Bitcoin's price plummeted again, falling to $5,555 within minutes, a drop of 28%, with liquidation amounts exceeding $2 billion across various platforms.

During the decline, mainstream exchanges such as Huobi, Binance, and OKEx experienced varying degrees of system lag, with many users complaining for long periods that the exchange apps could not properly display the homepage, market pages, and trading pages, causing issues with operations such as increasing positions, stop-losses, order cancellations, and withdrawals. This situation highlighted that mainstream exchanges still had not adequately resolved their trading systems' responsiveness under extreme market conditions.

The collective sell-off by large Bitcoin holders was considered a primary reason for this decline. For example, it was reported that Grayscale Investment, the world's largest cryptocurrency asset management company, sold 40,000 to 50,000 Bitcoins, while there were also reports from exchanges indicating that Bitcoin sell orders reached 400,000.

For a long time, Bitcoin has been referred to as "digital gold" in the blockchain industry, possessing good hedging properties. In January of this year, amid rising tensions between the U.S. and Iran and a global stock market downturn, Bitcoin rose from $7,200 to over $10,000, gaining the largest historical recognition for its hedging properties. However, under the risk of a global economic downturn caused by the COVID-19 pandemic, Bitcoin's price decline became the largest depreciation among various mainstream financial assets, likely signaling the end of its hedging properties.

Some analysts believe that Bitcoin should be classified as an alternative asset. In the current environment of extreme liquidity shortages, Bitcoin, as a high-risk alternative investment asset with unparalleled volatility, naturally sees funds withdrawn by investors seeking safer and more liquid assets, leading to a sharp price drop.

"In the future, everyone will realize that Bitcoin is not digital gold, but rather a 'magnifier of risk.' Its value cannot be anchored; unlike other assets whose prices are influenced by costs and prices, Bitcoin lacks a normal market value range. To date, it has not had any convincing valuation basis, resembling a small boat tossed in the storm. Without an anchor, its value fluctuates greatly, and the impact of halving and supply-demand relationships is far less significant than psychological factors," said Cai Kailong, a senior researcher at the Financial Technology Research Institute of Renmin University of China.

However, some industry insiders hold a different opinion. "BTC is still the most powerful currency in human history, providing liquidity 24/7, which other markets can't even imagine. But precisely because of this excellent liquidity, it became the first choice for selling to replenish funds when other markets faced liquidity shortages, which also led to the decline in gold. Given BTC's current market cap is far below that of gold, it naturally couldn't withstand the pressure in a short time," said a Weibo user "fhrp."

In addition to the sell-off by large institutions, some collateral lending platforms also passively became significant accelerators of this decline. Over the past six months, the DeFi concept has been particularly hot in the blockchain industry, leading to the emergence of many cryptocurrency lending platforms based on coin collateral.

As a result, many large Bitcoin holders would pledge their Bitcoins on third-party lending platforms and use the borrowed USDT to purchase spot assets, effectively leveraging their positions. However, these platforms are not mature in terms of collateral ratio settings and liquidation mechanisms. The slow transfer speed of assets on-chain for users increasing their collateral ratio resulted in many collateral orders having collateral assets fall below the borrowed assets during this rapid market decline, leading to a far greater amount of Bitcoin liquidations than in past periods of significant market fluctuations, further intensifying the selling pressure in the Bitcoin spot market.

From 19:00 on the 12th to the early morning of the 13th, Bitcoin's price hovered in the $5,800 to $6,200 range, as the market began to brew the next phase of movement.

2. The Second Crash

On the evening of the 12th, stock markets in major Western countries opened and collectively fell. Stock market circuit breakers were triggered in at least 11 countries, including the U.S., Canada, and the Philippines. By the early morning of the 13th, the Dow Jones Industrial Average and the S&P 500 both recorded their largest single-day percentage declines since the 1987 stock market crash, with the Dow falling about 2,352 points, marking the largest point drop in history.

The poor performance of the stock market quickly transmitted to the cryptocurrency market. Starting at 7:00 on the 13th, Bitcoin's price plummeted again from the $5,800 position, breaking through $5,000 and $4,000 in succession.

Regarding the rapid decline of the market, many industry insiders believe that the main factors were not only the panic selling in the market but also the mutual liquidation among contract investors. Weibo user "AlbertTheKing" pointed out that most of the leveraged long positions in Bitcoin were in the perpetual contract market of BitMEX. The drop in Bitcoin's price led to a chain liquidation of long positions, resulting in an arbitrage price difference with Bitcoin's spot price. Arbitrageurs rushed in to open long positions while selling spot assets for arbitrage, thinking it was safe, only to find that Bitcoin continued to plummet, leading to their own arbitrage long positions being liquidated. Initially, it was the leveraged longs stepping on each other, which later turned into arbitrageurs stepping on each other.

"Fhrp" also noted that since BitMEX only accepts BTC as collateral, the liquidation of ETH perpetual contracts also needed to be covered with BTC. The profit portion of the hedge could not be counted as collateral, and BTC was stuck in the transfer process, leading to severe shortages. The lack of transparency in liquidation orders made it so that no one dared to step in to buy the dip for fear of becoming a victim themselves. Of course, the more critical issue was the absence of a circuit breaker system to allow the market to pause and wait for liquidity to catch up.

Amid the intertwining risks, Bitcoin's price fell below $3,800 around 10:15 on multiple exchanges, including Huobi and OKEx, down 38% from the price at midnight that day and down 50.4% from 24 hours prior, setting a record for the highest 24-hour decline since Bitcoin's inception.

Such a precise drop raises suspicions about the malicious intent of behind-the-scenes traders at exchanges, if they indeed exist. However, it cannot be ruled out that this situation arose from a tacit understanding among major market participants or was purely a natural phenomenon.

From an objective standpoint, there is indeed some evidence suggesting that this situation was not naturally occurring. After Bitcoin reached the low of $3,800, its price quickly surged by 59% to $5,250 within the following 20 minutes, but then it rapidly declined again. At the turning point of $3,800, specifically at 10:16, the largest Bitcoin exchange in the cryptocurrency industry, BitMEX, suddenly experienced a system outage, which was not resolved until 10:40.

It can be seen that the timing of Bitcoin's price stopping its rapid decline and subsequent rapid rise closely coincided with the timing of BitMEX's outage and recovery. This not only demonstrates BitMEX's significant influence on the secondary market but also raises suspicions about BitMEX manipulating the market.

FTX CEO Sam Bankman-Fried stated on Twitter that he suspected BitMEX might have intentionally shut down trading to prevent further collapse and avoid using the exchange's insurance fund. Mining company BitPico also tweeted yesterday, "According to our analysis, BitMEX Research closed $993 million in long positions using its own bots and capital. Today's Bitcoin market manipulation was caused by a single entity, and an investigation is underway."

In response to the incident, BitMEX stated that there were hardware issues with its cloud service provider and later announced that a DDoS attack was the real cause of the temporary outage.

The exact reason for BitMEX's system outage is difficult to ascertain, but from its objective impact, the brief outage played a crucial role in curbing the further decline of Bitcoin and other cryptocurrencies, somewhat alleviating investors' panic and indirectly creating space for the rebound and correction of Bitcoin and other cryptocurrencies.

Sam Bankman-Fried even speculated that if BitMEX had not gone offline due to the "hardware issue" this morning (February 13), Bitcoin's price might have dropped to zero.

Compared to traditional financial markets, the effect of this BitMEX outage is quite similar to the "circuit breaker" mechanism in stock markets, pausing trading for several minutes during the most panicked moments of investor sentiment. Thus, this outage event has also prompted many in the industry to reflect.

"BitMEX helped the crypto circle 'circuit break.' Otherwise, this chain reaction of selling with no liquidity would have dropped to who knows where. After the circuit breaker, everyone calmed down, and the market returned to normal," Weibo user "Blockchain William" stated. "The market isn't afraid of falling; it's afraid of a stampede. That's why global stock markets have circuit breakers, because when investors panic, it's a bottomless pit, and once it gets out of control, there's no bottom at all."

Of course, the factors that led to the reversal of market conditions are not limited to this. According to multiple users on social media, several mainstream exchanges, including BitMEX and Binance, forcibly liquidated multiple short positions around 10:00 on March 13, indicating that the automatic reduction mechanism was at work.

According to BitMEX's platform mechanism, when investors' contracts are forcibly liquidated, their remaining positions will be taken over by BitMEX's liquidation system. However, if the liquidated positions cannot be closed in the market and the marked price reaches the bankruptcy price, the automatic reduction system will reduce the positions of investors holding opposite positions, with the order of reduction determined by leverage and profit ratio.

Specifically, due to the significant fluctuations in Bitcoin's price, a large number of long positions were liquidated in succession, leading to a shortage of market liquidity. To control risk, the platform automatically placed some high-leverage, high-profit ratio short positions in the market to increase liquidity and avoid risks caused by the inability to execute liquidation orders in a timely manner.

According to BitMEX's announcement, approximately 200 positions were automatically liquidated by the system. Meanwhile, Twitter user Edward Morra stated, "Approximately $500 million worth of short positions were liquidated on BitMEX alone." If this data is accurate, it means that BitMEX's liquidation operations brought over $500 million in market buy orders to the contract market, having a significantly positive effect on a market experiencing a chain of liquidations.

However, as compensation, BitMEX also stated that it would contact each affected user and compensate them based on the maximum potential profit they could have obtained during the automatic liquidation period.

Regardless, through the operations of exchanges like BitMEX, Bitcoin's price entered a recovery phase and has since hovered around the $5,000 mark, also driving a rebound in the entire cryptocurrency market.

After this thrilling 24 hours for Bitcoin, the ideal "halving market" has been shattered, and the real and harsh "halving market" has arrived. Perhaps many investors and investment institutions will change their perceptions of cryptocurrency assets represented by Bitcoin, and the confidence of the entire industry needs to be rebuilt, which relies on a deeper highlighting of Bitcoin's application value.