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Crypto Community Mulls Circuit Breakers Amidst Market Rout

In exchange for less volatile market action, adding circuit breakers may break crypto's ideological advantages according to many pundits.

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As Bitcoin traders slowly emerge from the latest market carnage, conflicting strategies about how and when to reenter top coins are only adding to the chaos. With the safe-haven narrative dead in the water, some experts are now looking to traditional markets for clues. The most unusual suggestion has been to mimic legacy exchanges’ use of circuit breakers. 

Derivative Lessons Learned for the Crypto Weary

After briefly falling below $4,000 in what amounted to more than a 40% drop, crypto enthusiasts are now doing a headcount. 

Survivors are also working quickly to reestablish an actionable narrative. Many commentators, like Peter Brandt, have indicated that Bitcoin may continue its drop below $1,000. Others are happily posting screenshots of buying the latest dip.

Touted as a safe-haven asset since it’s birth, Bitcoin is proving just as volatile as the traditional markets. A variety of factors further accelerated this parallel free fall. 

Consider the high activity across many exchanges, centralized and decentralized

For its part, BitMEX, the leader in options volumes according to CoinMarketCap, recorded the most liquidations of XBT/USD contracts since data supplier Skew began tracking the platform in 2018. 

The exchange eventually brought a halt to trading, but for technical reasons rather than anything market-related. The company’s official Twitter handle explained that the platform experienced a “hardware issue” with its cloud service provider. 

Though purely speculative, crypto traders remained skeptical that the issues had nothing to do with the mass of liquidations.   

Skew began tracking BitMEX liquidations in 2018. Nearly $1 billion sell orders were liquidated at the time of press.
Source: Skew

FTX exchange also recorded high trading volumes. In an email with Crypto Briefing, Sam Bankman-Fried said: 

“FTX has been growing quickly: from a new exchange a year ago, into a top 5 exchange now that just had a record day of over $5b volume. We also have an active options market trading ~1,500 BTC per day, making us possibly the second most liquid crypto options market.”

Bankman-Fried’s exchange also ran into technical issues during this wave of trading. 

Deribit, another notable derivatives exchange, was not excluded from the latest market activity. The Holland-based exchange tracked “record-breaking” options volume, according to Skew. 

Source: Skew 

The volatile, messy market action from the past week tested various features of the crypto ecosystem. On the exchange front, the wave of liquidations strained the likes of BitMEX, FTX, and Deribit, among others. 

Insurance funds on each of these exchanges endured the chaos, with Deribit announcing the addition of another 500 BTC of company resources to their fund. 

But unlike crashes in traditional markets, there was no backstop to protect the crypto market. Some commentators feel that this should change. 

Should Crypto Exchanges Have a Kill Switch?

In the event of a market fall, traditional exchanges have three circuit breakers. When flipped, they bring a halt to trading for a set period. This tool prevents further sell-off and added downward pressure. 

Circuit breakers on the NYSE, for instance, were triggered twice this past week as markets repeatedly crossed the first threshold of 7%. Trading was then halted for 15 minutes while traders regroup. The next set of breakers is set for 13% and 20%. 

If the market falls more than 20%, trading comes to a halt for the rest of the day.

This mechanism was first put in place in 1987 after a 22.6% drop on the Dow Jones Industrial Average. 

In many ways, circuit breakers help curb panicked markets from spiraling out of control. These do not exist in crypto markets, but some proponents view this as an ideological advantage. 

Jimmy Song, a noted Bitcoin developer, tweeted that circuit breakers are for the rich and that Bitcoin “punishes risk-taking through volatility.”

Others, like Tushar Jain of Multicoin Capital, wrote that: 

“Today’s price moves in crypto are a strong argument for industry-wide circuit breakers. The crypto markets structurally broke today & leading exchanges need to work together to prevent a repeat.”

Jain argues that due to the nature of slow blockchains, traders, unlike in traditional markets, were not able to make specific trades to capture the price action. This, he added, made “the extreme volatility much worse.”

The thought experiment has since erupted into two camps. 

Some, like Jimmy Song, argue that implementing trading curbs would taint the free markets in which digital assets exist.

Others, including an esteemed crypto researcher at Deribit, Hasu, agreed that circuit breakers could indeed be helpful. The arguments take on a new weight if one is to include the functionality of the DeFi space. 

The sharp fall in Ether, for instance, placed many DeFi projects at risk. Maker, a powerhouse within this market slice, posted an emergency vote which would have effectively shut the platform down. At the time of press, community members have voted this option down.  

Concluding, the latest market jolt has unearthed many existential questions about the space. The use of circuit breakers is just one of many narratives now in play. 

Bitcoin is currently trading at ~$5,402.88 and Ether is holding at ~$128.40 according to CoinGecko.  

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