29. November 2020

What BitMEX scandal? Bitcoin futures data shows that traders are focused on the $12,000

Sentiment in Bitcoin futures and options remained stable despite the news about BitMEX and Kucoin, indicating that a bullish run towards $12,000 may be near.

BitMEX used to be the undisputed leader in Crypto Bank futures trading (BTC) and if something similar to yesterday’s civil enforcement action had happened in 2015 or 2018, the cryptomarket would have completely collapsed.

Regardless of the partial recovery to USD 10,600, which was relatively quick, the derivatives markets remained stable during the drop from USD 500 to USD 10,400. Neither BTC futures nor options showed any signs of discomfort with the bad news.

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The futures market almost ignored the whole event and this is a strong indicator that investors are still bullish. It also suggests that the markets will test the USD 12,000 sooner than we expected.

As shown in the graph above, BitMEX had almost 50% of the market share until July 2019. This advantage came from being the forerunner of the so-called perpetual contracts market (reverse trading). In addition to not requiring KYC, the derivatives exchange also offered up to 100 times leverage and this helped to grow its user base.

After the market correction during Black Thursday saw the price of Bitcoin fall below USD 3,600, rival exchanges rushed to offer similar services and this led to BitMEX losing its position as the leader over the course of 2019.

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Some in the crypto community believe that BitMEX’s banning of American customers was the main culprit in its loss of market share, and others point to its aggressive settlement engine as the catalyst.

During the March 13 collapse, BitMEX faced several technical difficulties and was offline for 25 minutes. Somehow, when the inconvenience occurred and the price of Bitcoin fell below USD 4,000, the BitMEX insurance fund was able to increase its holdings by 1,000 BTC during the following 48 hours. Since that event, the open interest in BitMEX futures has been set below USD 1 billion.

If we look at the most recent data, BitMEX became almost irrelevant in terms of volume. In the last three months its market share was around 18% and although it’s impossible to measure the impact of the exchange on BTC’s price, it’s clear that it lost its advantage in the last eighteen months.

Bitcoin futures remained stable despite the news

The base indicator compares the price of futures contracts with the current level on regular spot exchanges. It is also commonly known as a futures premium.

Healthy markets generally show an annualized basis between 5% and 15%, this situation is known as contango. On the other hand, a negative basis (discounted futures) usually occurs during strongly bear markets.

BTC futures curve

The graph above shows an annualized 3-month contract premium of 5.4% or more for each exchange, except for BitMEX. Essentially, professional traders are indicating that their expectations were not affected by yesterday’s events.

If there is anything to be taken from yesterday’s news it is that it is an exchange specific issue with little or no impact on the futures markets in general.