For BitMEX, 2020 has been quite a rough year and from the look of things it’s only set to get worse.
The popular derivatives exchange is no longer as relevant and impactful on crypto market price action as it was 2 years ago, but a significant short-term price correlation among top exchanges has been proven repeatedly.
A well-documented case occurred in May 2019, when a large sell order on Bitstamp caused a cascading $250 million liquidation on BitMEX.
The following month, a Coinbase exchange outage triggered a $1,400 Bitcoin (BTC) price nosedive, as reported by Cointelegraph. A well circulated report by Bitwise Asset Management clearly showed that the top exchanges traded “extremely tightly.”
The report detailed how top exchanges influence pricing suggested that their movement is synchronized even when measured in milliseconds.
While BitMEX has denied the CFTC allegation of operating an illegal derivatives exchange, the problem is markets are not taking those words at face value, at least in terms of the futures premium.
Whenever a trader opts to buy or sell a futures contract, one is incurring the exchange’s solvency risk.
Even though it is possible to deposit a smaller amount and leverage the position, the margin is unlikely to be recovered if the exchange is hacked or suffers unexpected losses.
Therefore, if one exchange’s futures premium differs from the majority, it is a very worrisome signal as it represents lack of trust.
BTC 3-month futures premium. Source: Skew
The chart above shows how the BitMEX BTC futures premium has lagged behind the competition. This effect has also occurred in the past, but there has never been a continuous 5% difference.
In normal situations, this would be considered an arbitrage opportunity. Savvy traders would buy BitMEX’s cheaper contracts and simultaneously sell it using another venue.
What should have been a regular trading movement escalated to a situation where futures contract buyers are unwilling to participate no matter…