Margin Trading and the Bitcoin’s Price Decline

The price of bitcoin has been the focus of increasing debate over the past week, as, in the wake of its roughly $100 fall, the wider digital currency community has sought to find an answer for what could have caused such a sudden and unexpected movement in the market.
Adding to concerns were the two ‘flash crashes’ that reverberated widely in the mainstream press, one observed on Hong Kong-based bitcoin exchange Bitfinex and the other more recently on BTC-e – both of which have been widely attributed to the effects of the exchanges’ margin trading services on their respective markets.

However, members of bitcoin’s margin trading ecosystem allege that, in its search for answer as to what caused the crashes, the community has unfairly labeled them a scapegoat. This segment of the market, including the businesses that offer the service and their consumers, have been blamed unfairly as the impetus for the price decline, they say.
Speaking to CoinDesk, established margin trading service providers such as Bitfinex and OKCoin voiced their concerns about how last week’s events have been interpreted.
Offering a contrasting opinion, they argue that a stable bitcoin market requires the development of more advanced trading tools, including those just being introduced to the bitcoin market such as futures, derivatives and margin trading. Furthermore, they say that implications that margin trading has an outsized influence on the price of bitcoin are unfounded, and that they fail to characterize properly how their margin trading offerings impact their exchange services.

‘A thousand things’

Bitcoin Solutions president Adam O’Brien, whose Canada-based, still-in-beta brokerage service offers traders the ability to borrow 8x leverage, was sympathetic to the concerns of the bitcoin community. He questioned, however, that any one factor could be labelled as the driving force behind the price decline, saying:

“I see where people are coming from with these flash crashes, but there’s a thousand things that could cause a flash crash, just like there are a thousand things that could cause the price to increase rapidly.”

Zane Tackett, manager of foreign operations for OKCoin, which offers its international margin traders up to 3x leverage through peer-to-peer borrowing, acknowledged the influence of margin trading on last week’s decline. Yet, he cautioned that even without this activity in the market, the price would likely have reacted in a similar manner, telling CoinDesk:

“Downward pressure is going to bring the market down whether there is margin trading or not. So, margin trading might have made it happen quicker, but even without it I don’t doubt that we would be in the same situation as we are in today.”

OKCoin is one of three major bitcoin exchanges that offer margin trading, including BTC-e and Bitfinex. Other notable providers include BTC.sx, CampBX and BitMEX.

Educational offensive

Bitfinex has since become the exchange most commonly associated with margin trading due to the fact that prices in its order books declined precipitously last week, falling from roughly $550 down to $451 on 14th August in the first of the market’s two flash crashes.
As evidence of this link, Josh Rossi, vice president of business development at Bitfinex, took to Reddit on 15th August as part of an effort to better explain the volatility observed on the exchange and educate those he acknowledged may feel apprehensive about margin trading.
The ‘Ask Me Anything’ (AMA) session found Bitfinex seeking to highlight how it ensures a fair market on its exchange, while seeking to quell concerns about margin trading activity, which Rossi described as “baseless claims”. Rossi went on to explain that Bitfinex does not believe margin calls, stop orders or any type of leverage contributed to the flash crash on its order books, saying:

“We had approximately 650 BTC sold as the result of margin calls, out of a total amount of sales during this time of around 9,000 BTC. That is roughly 7%. Hardly, the cause of the drop in price.”

Rather, he suggested that a small number of very large orders hit Bitfinex on the morning of the price crash, and that they were flagged as potentially manipulative. As result, the exchange says the actions of the exchange actually prevented a larger crash than the one observed.
Bitfinex told CoinDesk:

“The drastic and sudden sale of a large number of coins, which would do the same thing to any exchange’s order book, was the main influence on people’s actions.”

The traditionally secretive BTC-e has not issued any statements regarding its own flash crash, and did not respond to requests for comment.

Fire in the movie theater

Bitfinex also provided detail in its AMA regarding how it uses “speed bumps” that slow down and flag large orders that could create undue “slippage” in the market, whereby the size of the buy or sell order causes the price to move (up or down) as it is being filled.
While not common for small bitcoin orders, slippage has long been a side effect for extremely large orders. As Binary Financial’s Harry Yeh explained at the time of the Silk Road auction, the 30,000 BTC sale was attractive to investors because if they had sought to purchase $18m in bitcoin on an exchange, the very act of executing the order would drive the price up roughly $50 per coin as it was being filled.

Read more:
http://www.coindesk.com/margin-trading-blame-bitcoins-price-decline/