Editor's Note: This article comes fromBlockVC（ID：blockvcfund）, Author: BlockVC strategy research team, reprinted by Odaily with authorization.
Editor's Note: This article comes from
, Author: BlockVC strategy research team, reprinted by Odaily with authorization.
The black swan is coming, and the encrypted asset market has been bloodbathed
The price of Bitcoin was halved in a single day, and the market value evaporated hundreds of billions of dollars
image description
The cumulative futures liquidation volume of the entire network reached 3.939 billion US dollars in the past 24 hours, and the long liquidation volume of BitMEX reached 863 million US dollars on March 12, a new high for the year. The large liquidation resulted in a 38% reduction in Bitcoin contract positions, and the bulls were bloodbathed.
image description
image description
A number of historical high data prove that the financial crisis of encrypted assets is unprecedented and far-reaching in scale and impact. This Bitcoin plunge is very likely to trigger a "encrypted asset mining disaster", leading to a major reshuffle in the mining industry. According to poolin mining pool data, most of the mining machines on the market, except for a few new mining machine series such as Antminer S17 and S19 and Whatsminer M30 and M31, have approached or dropped below the shutdown price, but thankfully What's more, the actual decline in the computing power of Bitcoin's entire network in the past 24 hours is less than 14%, and it will not have any impact on the security of Bitcoin's entire network in the short term.
image description
secondary title
ETH dives one after another, DeFi queues up to explode
image description
Among them, the total locked market value of MakerDAO, a well-known mortgage lending platform with a market share as high as 60% in the DeFi field, has fallen by more than 30% in the past 24 hours, falling below the threshold for a large number of loan mortgages, leading to large-scale liquidation and forcing MakerDAO had to auction the governance token MKR to repay more than $4 million of bad debts (due to the fact that part of the mortgaged ETH was traded at 0DAI during the actual liquidation). This black swan event fully reflects that the risks of DeFi are worthy of re-examination. The reason is that if the centralized financial system crashes, the decentralized financial system (DeFi) will be dragged down due to network congestion and slow update of oracle data. This will lead to a large-scale phenomenon of "queuing up to liquidate positions, unable to liquidate in time", which may indirectly expand the extent of investors' losses.
image description
Figure 6 DeFi data on Ethereum, defipulse.com
Stripping away the cocoon, analyzing the puzzle of "serial plummet" in all dimensions
The multiplayer of global assets plummeting, there are no eggs under the overturned nest
image description
Under the two major factors of the COVID-2019 epidemic and the sharp drop in crude oil, U.S. stocks have experienced two circuit breakers in the past two weeks. The major stock indexes have fallen by nearly 30%. European stock markets and emerging markets have also fallen violently. The second circuit breaker of U.S. stocks made Buffett, who is as calm as the stock god, also bluntly said "see you soon", not to mention other institutional investors with less seniority. After the market has recently entered a down cycle, Bitcoin has begun to show a strong trend correlation with US stocks. The risk asset attribute of Bitcoin is on the verge of a major shock to the global economy, and it can no longer show the hedging attribute as in the past, acting as a safe box for the world economy and finance.
image description
Figure 8 The stock market performance of the world's major economies in the past four months, source: Wind
image description
The leverage in the encryption industry is high, and the portfolio risk is rising all the way
In the past three years, one of the fastest-growing directions in the digital currency market is digital currency lending, including off-exchange mortgage lending, leveraged spot trading on exchanges, and decentralized lending in DeFi. According to Bloomberg reports, the loan scale of Genesis Capital, the largest player in the OTC lending market, has exceeded US$1.5 billion in the fourth quarter of 2019, and the entire lending market has exceeded US$5 billion.
image description
Figure 10 PayPal Finance's new loans and Bitcoin price chart Source: PayPal Finance Annual Report
image description
Figure 11 BUSD circulation and transaction volume in the past month, source: Coinmarketcap
Decentralized finance, that is, DeFi, has only gradually become known to everyone in 2019, but the stock market has reached hundreds of millions of dollars. DeFi projects including MakerDao, Compound, and Synthetix have built their own ecosystem through the pledge of digital assets. In its own lending market, credit accelerates expansion through decentralization.
image description
The above-mentioned many credit channels have increased the leverage ratio of the entire currency circle step by step under the call of the concept of "halving", which has laid a hidden danger for the subsequent plunge in the market. It is also because of the increase in the leverage ratio of the currency circle. Now it seems that the mainstream currency market in January-February this year is actually a market that is boosted by the existing funds on the market and the leverage increase on and off the market. From institutions to retail traders The sentiment of reluctance to sell is obvious, but the external incremental funds have not increased significantly. Therefore, the mainstream currency market with the concept of halving has nearly doubled in the past one and a half months, and the market wealth effect is obvious. On the way up, it did not experience a decent callback but has been accelerating. This also caused the market to gradually build a top and go bearish after February 20, and finally fell sharply.
The last foot off the cliff: Investors "deleveraging" tragically
In the one month after the price of Bitcoin hit $10,500, it did not continue to hit a new high, but turned down. There may be many reasons for the decline during this period, including profit-taking by traders in the secondary market, and early arbitrage by miners. Guaranteed cash and early profit-making of giant whales, resonating the financial market sell-off brought about by the global spread of COVID-2019, etc. When Bitcoin was driven by multiple factors, it reached a key price position - the last low point of Bitcoin price $6,700, that is, when a large number of miners’ loan pledge warning line is around this price, as long as some giant whales leave the market at a profit near this price or liquidate their positions, it will be the last straw that overwhelms the camel’s camel. Since then, once the price of Bitcoin falls below $6,500, a large number of forced liquidation orders will continue to pour out. The final result is that the serial liquidation that has been repeated in the financial market in the past has been staged vigorously in the digital currency market.
After huge fluctuations in the price on the market, the liquidity of the USDT OTC market dried up, and the overall premium rate of USDT reached more than 5% on the 12th. There is a problem of delay in off-site deposits, which hinders the entry of funds. For margin traders, the inability to replenish margins in time has once again exacerbated the phenomenon of liquidation in the futures market.
Because the digital currency market does not have an institution similar to the central bank to rescue the market, and there is no circuit breaker mechanism similar to the US stock market to stop the continuous market decline in a short period of time, the price will naturally move to the direction of least resistance. Only when the price falls low enough, There will be enough people who are willing to buy Bitcoin and take the risk of continuing to fall. The market can only bottom out when the buying and selling power reverses to generate a new balance, which is what we often hear about the hard landing.
The development of the digital currency market has been at the expense of part of the risk control and compliance supervision. Therefore, highly leveraged spot products and derivatives have greatly promoted the transaction volume and brought a lot of liquidity risks. On the other hand, off-market mortgage loans seem to have strict risk control. When the range of risk control behavior is too narrow, it has actually exceeded the tolerance of the risk control model. A risk control strategy based entirely on price is incomplete, because the market is not a certain value at a specific time and price liquidity, and when unpublished market data unintentionally resonates, the intensity will be beyond everyone's imagination.
Taking history as a mirror, seeing the future from the past
The slump of digital assets has been repeated many times throughout the history of the development of the financial market, as far away as the giant bear in the US stock market triggered by the Great Recession in 1929, and as recently as the global financial crisis in 2008 and the A-share stock market crash in 15 years. We can learn more by looking back at history. A good understanding of the impact of liquidity on the market.
image description
Figure 14 1928-1933 Dow Jones Index Price Trend Source: macrotrends
image description
The most recent series of financial market slumps came from A-shares in 2015, and it was also the "thousand-share limit" that impressed everyone the most. The A-share bull market driven by a large amount of leveraged financing has reached the extreme value of historical valuation. The sudden deleveraging has caused a large number of passive selling orders, causing the stock price to fall rapidly, and the story of serial liquidation is repeated again. Stocks with a valuation of hundreds or thousands of times have become toxic assets. Everyone is selling, but there are not many buyers. The sell order of the position seals the price of the limit down. The special price limit trading system actually contributed to the sharpness of the decline, because there are too many stocks accumulated on the limit, and they cannot be sold immediately after buying and the next day is likely to continue to limit, so there is no No one dared to take over these stocks. In fact, like the CDO in the 2008 financial crisis, it led to a credit crisis in the market. In the end, it still relied on the release of liquidity to actively purchase toxic assets to complete the market recovery.
Figure 16 2014-2015 Shanghai Composite Index Price Trend Source: macrotrends
text
The stampede of serial liquidation in the financial market is not uncommon. It happens from time to time when several basic conditions are met. When high leverage, deterioration of the fundamentals, and a price drop that exceeds expectations occur at the same time, the market is not far from the stampede Yes, and this digital currency market crisis is exactly the same as the several financial crises mentioned above. In the traditional financial market, there are central bank departments as the ultimate liquidity provider to expand the money supply, and regulators such as the China Securities Regulatory Commission set up market price limits and circuit breakers. However, the digital asset industry is still in the early stages of development. With the lack of regulatory links and immature risk control mechanisms, the industry can only achieve long-term development by clearing itself of excessive leverage and restoring market order.
secondary title
The new cycle of "deleveraging" has begun, and the market urgently needs to recuperate
After the tragic market decline, we still need to be clear that the fundamental value logic of encrypted assets carried by Bitcoin and blockchain technology has not been substantially affected in this round of decline. It is undeniable that digital assets such as Bitcoin have been embraced by many speculators because of their huge volatility since their birth, so that the saying that "the biggest application of blockchain technology is currency speculation" has been widely popular. Today, when the market has been hit hard, we should be soberly aware that it is not the first time that Bitcoin has experienced such a tragic decline in the eleven years since its birth. Every time this decline fails to kill Bitcoin, it makes Bitcoin stronger ; Smart contract platforms such as Ethereum, relying on distributed computing and development, have opened up a huge ecosystem of their own in just a few years. Tens of thousands of developers and builders have used hundreds of millions of lines of code to make " The "global settlement layer network" has begun to take shape; the issuance and trading of digital assets have spawned a number of independent companies such as Bitmain, Canaan Technology, and Coinbase that have been listed or valued at billions of dollars in China, the United States, and around the world. Horned beast enterprises, China is an important breakthrough for independent innovation of core technology using blockchain technology. The cornerstones of the existence of all these industries have not been changed by the sharp drop in the past two days. The secondary market changes erratically, but there will always be a day when it returns to rationality. In front of investors and practitioners.
While investors return to rationality and market order is restored, deleveraging and ecological optimization of the industry is imperative in order to avoid the recurrence of market chaos and curb hidden asymmetric risks in the industry.
At the exchange level, BlockVC calls for:
Promote the gradual transition of digital asset spot leveraged trading to futures contract derivatives trading, provide users with clear and clear trading market selection guidance, and avoid excessive influence of leveraged trading on spot index prices;
Set certain restrictions on the leverage multiples provided by digital asset futures contract transactions and spot leveraged transactions, and set certain thresholds for investors to enter leveraged transactions;
In the form of setting up ETF and other derivatives, through professional market makers and trading teams to issue products with spot as the underlying asset, so as to avoid huge fluctuations in the spot market and provide investors with rich investment targets
Promote the further improvement of the digital asset options trading market, reduce the overall risk exposure of the market, and make the yield curve more flexible;
Regarding how the majority of industry practitioners can survive and develop under the new "deleveraging" cycle, BlockVC provides the following suggestions:
investor
Quantitative team
Based on the experience of the two black swan events in mid-November 2018 and March 12-13, 2020, the price fluctuation range and speed of the encrypted asset market are much higher than any other market, so risk management and leverage management must be important for every Quantify the most important task of the team, followed by the pursuit of profitability. The grid anti-trend strategy that goes against the trend has been proven several times that it will eventually fail in the encrypted asset trading market. In a trading market with such a huge volatility, trend following is the real stable profit. Of course, whether it is a trend-following strategy or a market-neutral arbitrage strategy, careful use of leverage will be the foundation of long-term prosperity.
Since there are no barriers to entry in the trading and investment of the encrypted asset industry, both individual and institutional investors should take the initiative to learn and master relevant product and financial knowledge before entering the market, strengthen risk awareness, and cultivate financial literacy to improve themselves Survival and profitability in the market. For institutional investors, rational management of capital risks is achieved through the comprehensive allocation of trading tools with different risk characteristics such as active management funds, quantitative strategies, and arbitrage strategies; relatively speaking, individual investors should maintain Rationally assess your own risk tolerance, understand the rational allocation of funds, and be able to improve your investment level through continuous learning.
References:
