When it comes to Bitcoin, the first idea that enters people’s minds is volatility.
Well, maybe not yet, maybe the first thought is “What the hell is this magical Internet currency?” The most rumored thing about Bitcoin is its relatively small market value and huge volatility. The ability to make money.
The huge volatility and the wonderful myth of wealth that seems to be within reach have attracted amateur traders from all over the world to join the greatest frenzy in this financial market. For them, volatility represents value. For experienced Bitcoin skeptics, huge volatility has always been their primary weakness in fighting Bitcoin.
Of course, there is still a lot to talk about about the volatility of assets with a market value of about $250 billion, but we may be able to talk about it next time. Right now, Bitcoin is almost equivalent to volatility… Or at least our current understanding of Bitcoin is limited to this?
Looking closely at the data, we found ourselves in a puzzling position. Bitcoin is soaring to an all-time high, but its actual volatility and even its attractiveness to the public have fallen severely.
Source: Skew.com
How did that happen? Let us look back a bit to understand how we got here, where we found ourselves, and where we might go.
1. Introduction: BitMEX-the end of Bitcoin’s magic
First share a story with everyone.
In the “Lord of the Rings” trilogy, the task of the heroes (humans, hobbits and some elves) is to protect their race from the evil forces that are constantly approaching them and growing stronger. The evil forces intend to use the power of the “Lord of the Rings” to restore their status in the middle earth. Through the fierce battle between good and evil (beware of spoilers!), good wins and the “Lord of the Ring” is destroyed.
This trilogy is generally regarded as one of the greatest works of modern literature, and it is also the origin of many expeditions derived from it. But part of this has always puzzled me… Why are only some elves helping? Instead of all the elves come to help?
The first is a digression. In 2017, when everyone was talking about Bitcoin, a relatively small derivatives platform occupies the main stage. When Bitcoin entered the bubble burst, that small platform BitMEX had become the king of cryptocurrency exchanges. .
The early success of BitMEX is easy to understand because it is a trading platform that does not require KYC (Know Your Customer) verification. Anyone can invest in Bitcoin with 100 times leverage without using US dollars. .
Figure 1: May 2017: 20,000 BTC → September 2018: 180,000 BTC
The rapid development of BitMEX is mainly due to the collapse of speculative altcoin transactions and the decline in Bitcoin prices. Nowadays, the scattered speculators who were attracted by the huge profits of cryptocurrencies are forced to make profits in complex derivatives exchanges. And they are followed by professional investors.
2. Reverse “Robin Hood” effect
If you look at the All Exchange Inflows data, you will find that when the price of Bitcoin is around 6,000 and 10,000, the inflow of Bitcoin will increase sharply. At present, the inflow of all exchanges is still very low, which means that users have not sold the bitcoins held in their personal wallets.
In addition to the “reverse Robin Hood effect”, BitMEX has also witnessed a large number of proprietary trading platforms entering this field in order to seek the most optimized spread trading and market making strategies in the inefficient order book.
Perpetual contract funding rates exceeding 5 basis points per 8 hours were common in the past, but now they rarely exceed 1 basis point. Market makers have controlled the market, converged the spread to an almost negligible point, and further suppressed volatility (the sentence “and provide traders with more effective pricing” can be added here, so it is not without benefits.)
One of the most unique features of cryptocurrency native derivatives exchanges is the use of Bitcoin as collateral, which is also one of the biggest reasons for its price fluctuations.
At present, we have taken this as a matter of course for the industry, but the mathematical logic behind reverse perpetual contracts has exacerbated the volatility of Bitcoin. As mentioned by many others, and recently mentioned by Clarens Caraccio, a quantitative trader at Nibbio in the June FTX summary, the overall increase (net exposure) changes as the price of Bitcoin changes. Using the examples in the Clarens article, we can see the different responses brought by 1 BTC vs 10,000 USD in various price ranges.
In a period when everyone is selling and the uncertainty becomes higher, the delta of BitMEX long positions drops faster, which means that traders need to provide more collateral to maintain their previous leverage ratio or face higher liquidation Risk, thereby exacerbating volatility.
The big waterfall brought about by BitMEX’s liquidation on March 12 this year clearly demonstrated this phenomenon. The overall price of Bitcoin fell from $9,000 to $3,600 within 48 hours, and nearly $1.7 billion of Bitcoin on BitMEX was liquidated, which made the price of Bitcoin on BitMEX lower than that of almost all other exchanges.
At that time, the actual 1-month volatility of Bitcoin had soared to nearly 200%, while the 1-month implied volatility was as high as 180%. In the following months, as traders began to withdraw funds from BitMEX, spot demand exceeded the demand for derivatives prices, and Bitcoin’s volatility has been greatly reduced.
After the Bitcoin price collapse, as various cryptocurrencies began to enter spot trading and other derivatives exchanges, BitMEX’s market dominance declined sharply. BitMEX’s market share has dropped by nearly 33% because traders have found other new products that can be traded in USDT and DeFi.
Outside of BitMEX, exchange alliance groups with USDT as margin began to eat up market share, further suppressing the volatility of Bitcoin, especially the downward (price fall) volatility.
3. Decentralized finance (DeFi) erodes the territory of centralized finance (CeFi)
When I first heard this sentence from Arthur Cheong of Defiance Capital (DeFi eating CeFi, decentralized finance erodes centralized financial territory), I had no idea what DeFi is, and I don’t know who will go. Use this gadget.
In 2017, if you have an understanding of DeFi, it is limited to IDEX and EtherDelta, and at most it is a relatively crude and usable UI. However, by 2020, DeFi will be completely reborn through various projects and agreements that retain great value.
For now, the total locked value (TVL) of DeFi projects exceeds $12 billion, which is almost 20 times its value the previous year.
The focus we want to discuss here is not DeFi, nor is it to explore the future prospects of DeFi, whether it can grow (although DeFi’s development prospects are indeed good), but the impact of DeFi on Bitcoin’s volatility.
After the crash on March 12, some market speculators seemed to have found a new way to speculate on the future of cryptocurrency. The total locked value of the DeFi market is $12 billion, which not only shows DeFi’s ability to capture attention (attracting attention from BTC derivatives trading), but also means that it may have attracted funds to enter the Bitcoin market.
In terms of Wrapped Bitcoin (WBTC, ERC-20 tokens anchored to Bitcoin on Ethereum, issued at a ratio of 1 WBTC = 1 BTC), the total value has exceeded 1 billion U.S. dollars, further expanding the Bitcoin derivatives market Transaction volume.
DeFi also paved the way for holding cryptocurrency to earn income. Through liquidity mining (yield farming) or liquidity providing (liquidity providing), users can generate real income through Bitcoin or other assets.
This is not necessarily a new thing, because BlockFi and other lending departments have created cryptocurrency products that can increase yields, and these products will curb the volatility of these cryptocurrencies. However, the essential difference between liquid mining and these products is that liquid mining can obtain on-chain revenue at any time without central authorization.
Therefore, DeFi to some extent consolidates the idea of obtaining bitcoin income with zero risk, and further reduces the volatility in the entire bitcoin ecosystem.
4. The end of Bitcoin’s magic?
No matter how brilliant it has been, everything will eventually come to an end. Following the preliminary investigation of BitMEX by relevant departments in the summer of 2019, the government finally made a formal accusation against BitMEX this year, and a large amount of bitcoins flowed out of the BitMEX exchange. Under the previous system, this incident should cause violent fluctuations in the price of Bitcoin, but now BitMEX’s market advantage has died out, so such news has not brought any waves to the market.
4.1 Introduction: Elves
Later, we discovered that in the “Lord of the Rings” trilogy, the reason why the elves were so reluctant to help the forces of justice and the forces of evil was because most of their power and land were protected and controlled by the “Lord of the Rings.”
Destroying the Lord of the Rings meant destroying their own civilization, and therefore also meant the end of their rule in Middle-earth. For the same consideration, market participants are not so willing to give up the benefits of cryptocurrency’s native derivative exchanges, because these platforms have always been their most important source of income.
At the end of the trilogy, the elves sailed into the deep sea by boat to the “Undead Land”, where they chose to live forever. At this moment, we also find that we are at the end of an era-the end of the era of Bitcoin magic .
4.2 Traditional financial institutions set foot in the field of cryptocurrency!
With these allegations against cryptocurrency exchanges, strengthened supervision, severe crackdowns on exchanges, and possible further taxation of cryptocurrencies, it is difficult for cryptocurrency market participants to maintain their long-term optimism about the cryptocurrency market. .
However, it was these measures that paved the way for the new investor community. With banks, investment managers, business leaders, central bankers, and politicians all taking a keen interest in Bitcoin and other cryptocurrencies, in 2017 (“Making cryptocurrencies become more mainstream”) looked very naive Expectations have now become commonplace.
CME’s (CME) Bitcoin futures products have now occupied the second place in the market share, and organizations such as LMAX (a foreign exchange and gold exchange registered in the UK and regulated by the FCA’s UK Financial Conduct Authority) have begun trading in Bitcoin Occupies a dominant position in the spot trading market.
Source: Skew.com
In the most chaotic financial period in recent history, Bitcoin immediately transformed itself into a popular sweet pastry. Financial companies such as JPMorgan Chase, Goldman Sachs, Fidelity and DBS Bank have added Bitcoin to their watch list for institutional research and further development of custody and other potential products for customers.
4.3 Two bifurcated roads
Obviously, Bitcoin is being accepted by more and more institutions. However, with the advent of this trend, its magic for investors may also end. According to the current situation, the spot market has completely dominated the forward price discovery of Bitcoin.
Projects like Serum and Synthetix provide users with the ability to conduct real-time on-chain transactions through the market as in the past. These projects will allow users to conduct transactions without guarantees at any time of the day, and in some cases can also earn money without selling their cryptocurrency.
Although such projects are still in the early stages and there is still a lot of room for development, these projects are progressing very quickly. I believe that decentralized derivatives exchanges have opened a new era of magic in the cryptocurrency trading market.
In the end, what is presented to the world of Bitcoin and cryptocurrency seems to be a dual development path-on one side is a world composed of strictly regulated and compliant institutional investors, and on the other side is a completely decentralized DeFi exchange. world.
Choosing one of the two paths may not seem easy, but fortunately, traders can choose both. Finally, the era of extremely turbulent cryptocurrency that we have known in the past is over, and a new era is in front of us.
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