Crypto Market has seen the biggest liquadation in its history this weekend. Adam Cochran tweeted about the possible reasons for this and it seems reasonable. The tweet thread goes as below

So a lot of people think that the treasury rumor (which is painfully false) caused the crash. While maybe it was a contributing factor, it certainly wasn’t the cause. My current working theory is that there could have been an exchange issue driving this.

First off a lot of things had to go wrong for an experience like last night to happen. You can think of it like moments in history that sparked wars. There were the right set of conditions, a catalyst that cause the acceleration, and a spark that caused it to erupt.
Weekend markets are the right condition for disaster, where you have low liquidity. This impacts us more and more as we go on, as institutional involvement gets larger and so weekdays have a higher average liquidity.

Then you have the catalyst, this was the fact that the market had been filled with FOMO and exchanges were allowing any retail user to use up to 100x leverage. (And I mean anyone, if you get your ‘test’ answers wrong on Binance it just corrects them for you & lets you in)

We had a lot of crypto gurus promoting long dead coins for massive pumps (and I’m talking about coins that I’m not sure even have development teams anymore!). Meanwhile, many of them were hedging into cash positions. This sets up a pretty dicey futures market, and that’s even worse on retail heavy exchange like Binance, as the orderbook is pretty tightly packed around the price, and thin when it comes to backstops.

Painful Day for Retailers

But, the spark, the spark that set off the largest single day set of liquidations in crypto history?. I don’t think that was anything to do with a poorly sourced, inaccurate tweet, on an English heavy website at midnight on a Saturday. Instead, I think something borked on someone’s books. Usually a dip like this is a small dip that gets exaggerated by either an engine or operations failure.

It was Binance that led the market in the dip, and specifically Binance futures. We know this because the futures market is what tanked the hardest, fastest and furthest. In fact on Binance, the drop was so bad that you were able to pick up long-term futures at prices well below the spot market. While spot dipped to $51k, futures were trading in the low $40ks.

That tells me that something was failing in terms of arbitrage or backstop, but that it started in the futures market and everything else was being dragged down with it. I think what we saw was a cascade of tightly wound retail positions on a weekend market, get toppled, but somewhere along the line, there was a matching book fail that caused stop-losses to not get hit and when that happened it put a massive $63M position in jeopardy.

That $63M position getting liquidated is what put the market in major jeopardy, but by that time there was already degraded performance issues connecting to Binance and spiking gas fees. So there was very little way for anyone to backstop or arbitrage that liquidation.

It likely set off another cascading round of liquidations on a thin book. But connectivity or outage issues drove this. That’s why the market was so inefficient for over an hour after the event. There were all sorts of arbitrage opportunities, weird flash sales, and mismatched options/futures last night, which big trade firms work really hard to capitalize on the opportunity between. So when you see those appear it usually means access issues.

Whenever the crypto market is high, people out there publish and cycle through various FUD messages trying to drop the market so they can gain on shorts. These happen dozens of times a day, but usually they go unnoticed. Once we have a major market drop, we tend to go looking for a single obvious spark that caused the issue externally and can over correct to weak evidence just because it is an easy narrative.

What you had here is typical weekend behavior, magnified by overleveraged new retail and a technical stress test failing leading to a perfect storm. No evil boogieman banning or criminalizing crypto, etc. But, I also don’t buy that it was ‘just’ liquidations, because I know plenty of trading firms who had cash on hand and would have had a willingness to start buying up those liquidations long before the huge drop, so I think there was likely a systems hiccup somewhere.

When you look at the usual suspects, Coinbase dips were in the average range, Kraken lacked the volume to cause a dip this big and FTX ran smooth as butter. So that really leaves Binance, although I’m not sure we’d ever get clarity on the issue if one happened anyway.

20%-30% corrections are not unheard of in a bull market, but, we should expect this cycle to be the same as we’ve got much more robust systems of backstop and arbitrage and much more money in the system. But that doesn’t mean those emergency breaks can’t ever fail. We may see a bit more fear based selling from the now shaken new retail, but, I think the worst of it is over and we’ll likely see a lot of hungry institutions buying up at these rates come Monday. PS- Reminder this is a working theory, its impossible for us to get the data we need to know for sure, so all we can do is take educated guesses and try and interpret the market.

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