Bitcoin is currently down around 11% from a price of $52,000 to just under $47,000. It dropped as much as 18% today before climbing back but it brought a number of exchanges down with it.
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Bitcoin's hefty slip caused a surge of traffic to exchanges as people sought to sell their crypto or buy more during the dip. Coinbase told its users that it was "experiencing degraded performance across our transaction services" and that "funds may be delayed and transactions may be canceled at elevated rates." Reports of issues with other exchanges like Gemini, Kraken and Binance also flooded crypto-Twitter.
The issues angered many clients who simply could not access their money in a period of high volatility. People have begun to place blame on a number of things, including market manipulation, but the most likely cause of the flash selloff was over-leveraged positions on margin accounts.
Many exchanges allow clients to trade with massive margin rates. For example, exchanges like Huobi and Bybit allow their clients to have up to 100x margin. That means if a client invests $1, those exchanges lend the client another $99, allowing them to use $100 worth of value to trade.
These margin rates are significantly higher than ones found on traditional brokerages and they can perpetuate volatility in either direction.
The director of research at the block, Larry Cermak, said he thought the current selloff was healthy as it removed dangerous over-leveraged margin positions from the market.
The first two exchanges on this chart with the largest selloffs in this crash are Bybit and Huobi. These exchanges also allow the largest margin rates in crypto. In fact, Bybit is a margin-only platform.
All margin accounts need to remain above a certain amount of value. If the value falls below this level then the account holder must either add more funds or have the assets liquidated. If many people have taken out risky margin accounts on the same asset, it is possible to have a cascading selloff effect where many margin positions are liquidated at once during periods of extreme volatility.
As the chart shows, Bybit alone was responsible for nearly $1 billion in liquidations. This effect can also occur if enough traders have set stop-loss trades around a similar price, though margin seems to be more responsible for the speed of this selloff given how much of the liquidations occurred on Bybit and Huobi.
Many traders will often attempt to purchase an asset when there is a rumor of an announcement and then sell when the announcement actually occurs. Traders likely began investing in Bitcoin during the run-up to Bitcoin becoming legal tender in El Salvador only to sell on the day it was actually made law. This likely lowered Bitcoin's price just enough to trigger liquidations on margin accounts, which further perpetuated the crash.