Bitcoin dropped sharply by 50% after investors worried about the Corona virus. The question is, is this move outrageous?
Current crypto market price | Source: Coinmarketcap
Flash crash raises the ghost of Short bans
On a dark Thursday, Bitcoin has dropped to an unprecedented price level since April 2019, halving its value as fear tightened markets around the world. The massive sell-off is an atom bomb, in which all cryptocurrencies suffer except stablecoins.
The $ 1 billion Long positions were liquidated on Black Thursday, raising serious concern about the viability of leverage and derivatives trading in the cryptocurrency market. After the incident, the Huobi DM derivative trading platform introduced a partial liquidation feature to provide a circuit breaker to limit trading losses in the event of a flash crash.
Moreover, a significant percentage of cryptocurrency trading volume occurs on BitMEX, OKEx, Binance Futures and FTX, suggesting that leveraged trading is having an disproportionate impact on spot prices.
Last October, analysts discovered that cryptocurrency futures accounted for about 50% of trading volume. According to analyst firm Skew, before the severe decline, BTC futures traded around $ 5 billion in OI volume.
BTC Futures | Source: Skew
According to cryptocurrency data analytics provider, Datamish, about one-third of the open Bitcoin margin position is Short (up from about 10% at the end of February).
Bitcoin price, total profit Long and Short (30 days). Source: Datamish
Moreover, the data shows that currently about one-third of those Shot positions are covered.
Bitcoin Shot positions are insured and unprotected (30 days). Source: Datamish
Market collapses can be mitigated if short selling is banned, but is this the right approach and even so, is it feasible? This is causing great controversy on social networking groups, many people said that Bitcoin was not like that before the short sale appeared.
The traditional market is protected from Short pressure?
Markets in Belgium, Greece, France, Italy and Spain have all imposed bans on short sales of certain stocks and the Dutch government is considering the case. Prior to the recent global financial crisis, global markets had placed a ban on short selling of financial stocks, in SEC's words, protecting the integrity and quality of the stock market and consolidating investor confidence.
The reason behind the short selling pause is to help increase the market in times of uncertainty and volatility. However, studies have found that banning Short investors actually harms the market.
Alessandro Beber and Marco Pogano research on short selling restrictions after the global financial crisis announced above The Journal of Finance shows:
Short-selling bans imposed during the crisis are associated with statistically and economically significant liquidity disruptions, that is, with an increase in the buying spreads and in the Amihud liquidity index. control of other variables.
In other words, it worsens short-term volatility. In the long run, there is no downside pressure imposed by the Short on the market, no technical dampers in long-term speculative trading. The risk accumulated here is the creation of an asset bubble.
Researchers from Princeton, Jose Scheinkman and Wei Xiong also reached a similar conclusion in their study titled Overconfidence and Speculative Bubbles (Overconfidence and speculative bubble.) The researchers found that when short-term opportunities are limited and price disagreements arise, optimism and overconfidence combine to create a price bubble.
In other words, without Short pressure, traders tend to believe that they will always have the opportunity to sell assets at a higher price than they bought them.
Vietnam stock market has not yet applied short selling, which is also the reason why some stocks have bubble and when collapsed, they often cause market turmoil. Short selling is a means of restraining happiness during a price rise, making the market more stable.
Prohibiting Short in the cryptocurrency market is not realistic?
The effectiveness of banning short on cryptocurrency exchanges also depends on its practicality. Given the structure of the cryptocurrency trading industry, where multiple exchanges of varying sizes exist in a number of jurisdictions, coordinating a set of rules will be almost impossible.
Any rule that cannot be enforced across the industry will create market distortions. If one exchange does not allow short but others allow, traders will use arbitrage opportunities by buying cryptocurrencies where they are cheap and switching to selling places that are more expensive than spreads.
Short basically creates a healthy discount pressure on cryptocurrency assets. Prohibiting it may alleviate some of the short-term pain during periods of extreme volatility but will almost certainly make the industry mature in the long run.
According to Cointelegraph
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