It is tempting to blame Bitmex and Bitcoin futures for drops in crypto prices, as both give traders a way to make money pushing the price of crypto down. But is that a valid view?
First off, it is hard to deny the correlation. Bitcoin futures go live, Bitcoin’s price goes down 75% shortly after. Ethereum, Bitcoin Cash, and Litecoin 50x perpetual swap contracts go live on Bitmex, those coins lose 50% of their value shortly after (those contracts let you take for example a 50x short position).
The pattern is clear, a derivatives product appears that allows people to profit from shorting a crypto, and then that crypto takes one of the biggest hits of 2018 immediately after that product goes live. Either lightning is striking randomly in lovely patterns, or there is a connection.
Point being, I think we can argue that the correlation is there, and it is even typical for crypto if we think of these products as the inverse of a coin getting listed on a major exchange, but that correlation doesn’t itself imply a direct line of causation alone (as we all might remember from the correlation / causation memes).
Likewise, even if there is some correlation and causation, it doesn’t imply (for example) that Bitmex as a company or those behind Bitcoin futures directly influenced things.
Reality is likely more complex than just blaming derivatives or accusing a single entity of manipulation (just like the issues surrounding Tether are for sure more complex than accusing Tether of printing money out of thin air).
I think of correlation / causation this way, “Correlation does not imply causation, but it can indicate it. The more correlating factors between events, the more likely there is a causal relationship of some sort.”
So here the question is, not “whodunnit,” but instead, “what is the relation between derivatives and HODLers getting REKT?”
If we want to understand why prices are crashing to their doom, and why specifically this is happening with coins after traders get a new way to short them, we first have to zoom way out on crypto charts and see the epic gains that have been made since 2015 – 2016.
Then we need to look at 2017 and see the “pump” that pushed crypto prices way ahead of where they probably should have been (partly in anticipation of Bitcoin futures).
Then we have to look at market cycles, the history of economic bubbles, and the history of cycles and bubbles in crypto.
In doing all of this we can see that a crash style correction of 70% – 90%+ was very likely from the height of the bubble, especially for alts.
Also, we have to consider that even now some cryptos are up from their 2017 lows in USD and or BTC.
Knowing all that, it is only logical for those who were playing the rise of crypto before to switch and play the fall.
Think about it. You made a gajillion dollars riding ETH to $1,500, and you now also have a ton of ETH, you know it has to fall, yet you have to control the price to distribute your ETH bags, you still want to make money, you still want ETH in hand next time it goes up, and you are meanwhile stuck in a position where you are doing a ton of work for little reward and taking risk.
You aren’t getting the returns you got on the way up, and you risk ICOs and the market dumping on you.
Thus, the second you find a new way to hedge and leverage to profit from the bear market, you take it.
Once you can short Ether on Bitmex at 50x, it takes the focus off 1x – 3x on Bitfinex and spot on Coinbase Pro.
Instead of supporting the price on the spot exchanges, you could move your funds to Bitmex, go short, remove your buy orders from Coinbase Pro, and instead dump your Ether on Coinbase Pro pushing the price down, filling your 50x perpetual short contracts over and over (taking a breather to switch to long contracts here and there).
Boom, now you have profit, and can accumulate as needed with your piles of crypto and cash.
Of course this isn’t just Joe the Whale doing this, this is every slightly smaller player, and everyone and their mother with a newly opened Bitmex account, with more and more doing it over time. It’s like BTC $20k in reverse, it is ramping up, going parabolic, and spurred on by the excitement over new products.
The bottom line is that the bear market is real and people are driven by greed and incentive. In a bear market, especially in one you expect to be followed by another bull market, dumping the coins you want to accumulate next cycle, while shorting with high leverage, is a power play that results in you dominating next cycle.
You make money from coins going down, you then get coins cheap. This is the holy grail…. and that is why people are doing it.
Of course, that has its own set of issues.
- If everyone is doing it, you can see how it can take a bear market and make it worse.
- If everyone is profiting from shorting crypto, it kind of breaks the system and sets up a situation where things will have to reverse (sure you can stop trying to short BTC and focus on ETH, LTC, BCH, etc… but after a while you’ll break those too).
As short pile up, as they have been like we can see on Bitfinex’s BTCUSDSHORTS, the time eventually comes when short interest will be through the roof. At that point the incentive might just change, at that point big players can squeeze the many, forcing liquidation, getting their coins, and starting the next bull cycle off with an epic bang (as just like the general population lagged to short, they too will likely lag to become long).
… and that is one of the many things that makes using a VPN to access an exchange and put your crypto up at 50x and risk liquidation a bit like going to a virtual casino (a risk that becomes increasingly attractive as the market turns more bearish, but a risk that becomes risker the further away from the highs we get).
Of course there are other risks too. Like, does Bitmex’s servers go down when the next great short squeeze happens? Well, maybe? You have increased loads and the threat of DDoS and all the fortunes people made in crypto sitting on a single exchange at high leverage while people panic sell what will be the bottom (who knows what that bottom is?)
There are no pump and dumps for now, there is no moon, there is only the ultra high stakes Casino of the derivatives market. It’ll be glorious, until it gets ugly, and there really is only so much you can blame a single entity for that.
In other words, be we talking about Bitcoin futures or Bitmex, or leverage on other exchanges that allow it, just like if we are talking about Bitfinex and Tether, blaming the gatekeeper seems short sighted. It isn’t the platform causing Bitcoin to go down (although it doesn’t help), it is mass psychology, big players, and natural cycles facilitated by platforms and products.
When ETC got listed on Coinbase, it had a little pump, and bulls were happy. When 50x ETH swaps got listed on Bitmex, ETH went down 50% and bears were happy. When BTC futures were announced, BTC went up and bulls were happy. When futures launched, Bitcoin went down 75% and bears were happy. IF A BITCOIN ETF COMES ALONG PRICES COULD SKY ROCKET… and bulls would be happy (and bears might complain of ETF manipulation). Etc.
The correlation is there with these things, but it is those using the platforms, from big players, to traders, to investors, to panic sellers who are the root of price movements. It is way too simple to blame the products or the platforms, instead we need to consider the system as a whole, cycles, and the grand relationship of all these things.
In some businesses, like running Bitmex or being a whale, you make money no matter what direction the market turns. In other businesses, like running a crypto site or being a HOLDer, life isn’t as fun when the market is tanking and shorts are ruling the day… but that doesn’t mean there is a grand conspiracy. That is just the way the cookie crumbles.