In these complex and uncertain times, governments worldwide are struggling to grapple the sheer magnitude of the COVID-19 outbreak. As well as major civil disruption, financial markets and institutions have responded with devastating crashes globally.
And the cryptocurrency industry - although in many other circumstances considered a relative safe-haven compared to traditional markets during the kind of global upheaval we are currently experiencing - has not escaped this unprecedented downturn.
Bitcoin Tumbles in the Wake of Worldwide Financial Instability
Last month (13 March), Bitcoin saw a 50% decrease in value while at the same time the Dow Jones Industrial Average saw a 9.99% drop - the worst liquidation event on the exchange since 1987.
There has been a strong correlation between cryptocurrencies and the U.S. stock market during the growing crisis and the volatility it has caused is palpable.
But on a smaller scale - volatility in individual exchanges can have a huge effect on traders too, especially when compounded by larger factors.
On the same day that bitcoin nosedived, major crypto futures exchange BitMEX suffered a 25-minute outage leading to massive losses with requests going to and from the BitMEX platform suspended.
The derivative exchange’s perpetual contracts (XBTUSD) plummeted in value and many suspected foul play. Some believed the outage was orchestrated by BitMEX staff in an effort to stop its liquidation engine collapsing during the meteoric fall in the value of bitcoin which, many speculate, could have brought the XBTUSD order book down to zero.
A Conveniently Timed Cyber Attack?
Of course, the official response from BitMEX was very different. In a statement, BitMEX claimed that “Last Friday, 13 March, the BitMEX platform was subject to two distributed denial-of-service (DDoS) attacks.
“These attacks delayed or prevented requests going to and from the BitMEX platform, causing direct disruption to our users.”
“During a peak moment of market volatility,” it continues, “the botnet overwhelmed the platform via a specially-crafted query to the Trollbox feature, prompting the database’s query optimiser to run an extremely inefficient query plan.”
The team added that any downtime would “degrade” the experience for all customers reducing the exchanges stature in the market so it would be against their own interests to fabricate it.
Diversification is a Risk Management Staple
However it came about, the BitMEX outage highlights the importance of diversifying your portfolio. Crypto derivatives traders with too much invested in XBTUSD will have experienced a catastrophic loss.
Almost every experienced trader will agree that diversification is one of the best ways to protect your investments. In a recent article for Nasdaq, Warren Buffet said, “I have two views on diversification.
“If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else, if it's not your game, participate in total diversification.”
Derivatives come in a number of forms and spreading investments over various contracts is an effective risk management strategy that protects against the kind of scenario many BitMEX investors may have just experienced.
The four major cryptocurrency derivatives include:
Futures: These contracts allow traders to purchase an asset at a pre-agreed price on a particular date later down the line.
Forwards: A forward is very similar to a futures contract but is a little more customizable and is usually traded on over-the-counter (OTC) exchanges.
Options: An option gives traders the opportunity to buy or sell an asset at a predetermined price - there is, however, no obligation to buy.
Swaps: Swaps tend to be used between two traders to exchange one asset for another.
C-Trade: A Crypto Derivatives Exchange Built on Trust
Although the event at BitMEX was the most publicised in recent weeks, it may not have been the only one. Other exchanges, including Gemini, Huobi, Deribit, and Bithumb are reported to have experienced similar issues.
One thing that traders using the C-Trade platform can be sure of is that, from the very beginning, fairness and transparency has been our top priority whilst building the exchange. We will never knowingly, or willingly, create or allow a scenario where our users pay the price for unforeseen market conditions.
Our commitment to fairness underpins our platform making C-Trade a derivatives exchange you can trust - always.
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