Bitcoin Crash Raises Questions About Need for Circuit Breaker

Author: Lindsey Boycott

Estimated read time: 3 minutes

Publication date: 17th Mar 2020 11:49 GMT+1

Bitcoin is one of the latest casualties of the coronavirus pandemic, and last week's crash was colossal by any market standard. The digital currency enjoyed a high of $7,969 before falling 55 percent to hit $3,596 in 24 hours. It's a volatile time, and some believe the market is breaking in just the way it's supposed to in these kinds of situations. People are calling in all their noncollateralized liquid resources to shore up margins and buffer businesses that are currently hemorrhaging money.

Regardless of the reasons driving the wild fluctuations in Bitcoin’s value, some people are calling for "circuit breakers" on the crypto currency market – similar to those used by stock exchanges. Traders have preached the pros of the crypto market's 24/7/365 cycle, but naysayers are raising concerns over how viable the crypto technology will be over time.

“Today’s price moves in crypto are a strong argument for industry-wide circuit breakers,’ Multicoin Capital’s managing partner Tushar Jain said in a Thursday tweet. “The crypto markets structurally broke today & leading exchanges need to work together to prevent a repeat.”

"Several large market participants went bust," he went on to say. "Many traders literally could not get money to the exchanges fast enough to trade due to blockchain congestion & the extreme volatility was then made worse. Cryptocurrencies' long-term success depends on whether exchanges can chill volatility.”

Circuit breakers are trading halts applied to wider market indexes or individual securities when there is a 7 percent (level 1), 13 percent (level 2), or 20 percent (level 3) intraday move to prevent panic-selling. On both March 9 and March 16, regulator stoppages were issued for the NYSE after the Dow Jones dropped 7 percent in a day. The rationale is to provide traders and systems a chance to process the slew of orders and cool off before market activity resumes.

Interestingly, a number of the major crypto exchanges experienced outages on Thursday. One example is BitMEX, which experienced some interruptions due to required maintenance, preventing trading during that time. Going offline happened to occur as Bitcoin was in the midst of one of the most severe plunges in its eleven-year history. Over $700 million in liquidations were processed, and Bitcoin’s value almost halved in that time.

Sam Bankman-Fried, CEO of Alameda Research and cryptocurrency derivatives exchange FTX challenged BitMex’s timing of its outages. Titled “Insane theory of the day,” the chief executive queried whether the offline time was actually a way to buffer against the complete collapse in bitcoin. He speculated that BitMEX curbed bitcoin’s sell-off by going offline and gave space for prices to rebound above $5000, thus making sell-offs needless.

BitMEX denied the claims through its Twitter (NYSE: TWTR) account, stating: "There is no conceivable reason why a platform like BitMEX – which has operated for over 5 years and counting – would lower itself to the degree you proposed to avoid a situation for which it is already prepared.”


Photo by Andre Francois McKenzie on Unsplash


Disclaimer: The writer is an experienced financial consultant who writes for The observations he makes are his own and are not intended as investment or trading advice.