BitMEX maintains significant liquidity and open interest (OI) but can still face customer migration.
2020 has been a pretty tough year for BitMEX and from what we can see things are getting worse and worse.
BitMEX is no longer as relevant and influential to the price movement of the crypto market as it was two years ago, but short-term price correlations between the top exchanges have been proven time and again.
The most fully documented case occurred in May 2019 when a large sales order with Bitstamp caused a liquidation of $ 250 million at BitMEX.
The following month, a trade failure at Coinbase triggered a bitcoin price drop of $ 1,400. A report published by Bitwise Asset Management clearly shows that the top exchanges have an “extremely close” relationship.
The report, which details how the top exchanges affect price, shows that their movements are synchronized even when measured in milliseconds.
While BitMEX has denied the CFTC’s allegations of running an illegal derivatives exchange, the problem is that the market is not accepting this, at least when it comes to futures premiums.
When a trader buys or sells a futures contract, he is exposed to the risk of the market’s solvency.
While it is possible to deposit a smaller amount and take advantage of the position, margin is unlikely to be restored should the exchange be attacked or suffer unexpected damage.
Therefore, if an exchange’s futures premium is different from others, it is a very worrying signal as it represents a lack of confidence.
3-month bitcoin futures premium | Source: Skew
The graph above shows that the Bitcoin futures premium on BitMEX has lagged behind its competitors. This effect has also occurred in the past, but never with a continuous difference of 5%.
Under normal circumstances this would be considered an arbitrage opportunity. Skilled traders will buy BitMEX’s cheaper contracts and sell them elsewhere at the same time.
That should have formed a regular trading movement, but here futures buyers are reluctant to participate regardless of the cheaper BitMEX contracts. This is mainly because traders are concerned about solvency risks.
This price action was exactly as originally expected as the lack of participants resulted in a decrease in liquidity, the number of withdrawals increased and ultimately resulted in the price on BitMEX falling compared to other major exchanges.
This downward spiral is possible even if you exclude the possibility of BitMEX funds being seized by government agencies or worse.
The risk of BitMEX being boycotted
Bitcoin futures volume by exchange | Source: Digital asset data
Hence, a boycott of BitMEX could be made regardless of its futures trading volume and open interest. The longer its premium stays below the competition, the less trustworthy the stock market is in the eyes of investors.
This cycle is likely to result in many investors withdrawing their funds and permanently closing their accounts with BitMEX. It is also possible that this outlier could have a short-term impact on prices.
In summary, investors should not ignore these serious problems just because BitMEX is rewarding withdrawals or keeping its current market share. Traders tend to overestimate volume and open interest metrics, but both can easily be inflated.
On the other hand, futures premiums are expensive and difficult to manipulate.
According to Cointelegraph