On March 13, trading giant BitMEX was thrust into the middle of a controversy that saw the premier exchange face an operational outage that lasted for about 25 minutes. During the downtime, rumors spread throughout the cryptoverse that some foul play had been going on behind the scenes, especially since Bitcoin’s (BTC) price fell to around the $3,700 mark.
To help allay some of the suspicions that arose due to the aforementioned outage, BitMEX’s PR team issued a tweet that read that the company “became aware of a hardware issue with our cloud service provider causing BitMEX requests to be delayed.”
While the given explanation seems quite legitimate, it is worth highlighting that on the day, BitMEX saw more liquidations than during any other 24-hour period over the course of the past year. Additionally, following the event, the trading platform’s BTC futures transaction volumes were surpassed by those of OKEx’s — a niche that has long been seen as BitMEX’s core area of dominance.
Against a backdrop of heavy losses, BitMEX has faced a barrage of criticism, with people like Sam Bankman-Fried, CEO of research outfit Alameda, posting a series of tweets claiming that it was BitMEX’s unwillingness to address market conditions that caused Bitcoin’s value to plummet so rapidly. Moreover, when the platform went offline, the value of the top cryptocurrency started to rise once again, thereby prompting Bankman-Fried to post the following message online:
“BTC rallied without the gigantic sell wall of the BitMEX liq. And even more than that — BTC rallied, so fewer people *had* to be liquidated... Creating a self-fulfilling prophecy. If we could will BTC up above $5K, maybe then it would no longer *need* to go down.”
To get a more detailed understanding of the matter, Cointelegraph reached out to BitMEX. A spokesperson for BitMEX, reiterated some of the facts that had previously been highlighted by the exchange via Twitter and stated that at 12:56 p.m. UTC on March 13, 2020, BitMEX came under an aggressive DDoS attack, which delayed and prevented requests coming into the platform, adding:
“Our security team regained control to prevent further delays and resumed full service within 25 minutes. We have confirmed that the issue earlier in the day on 3/13 was caused by the same attack. We fixed the underlying issue and we will be issuing a post mortem in due course. Our engineers are working around the clock to monitor and mitigate any further issues.”
When asked about some of the theories that allude to a possibility of BitMEX having pulled the plug on its trading services out of fear that its liquidation engine could collapse the XBTUSD order book all the way down to zero, the spokesperson stated:
“That is absolutely not true. We have, and will always, operate a fair and efficient platform. BitMEX is fully prepared for such liquidation events through our insurance fund, which is the largest in the industry by an order of magnitude and remains healthy.”
Lastly, earlier on Mar. 16, Arthur Hayes, CEO of BitMEX, took to Twitter to assure the exchnage’s clients that he and the team will shortly be fielding a number of queries that users seem to have in regard to the recent outage. In his statement, Hayes said:
“We have been listening, and my team has been gathering the facts. We will be addressing these questions and concerns transparently and comprehensively over the coming days.”
Some in the crypto community are still not convinced
While BitMEX has remained true to its version of the story, Alireza Beikverdi, CEO and founder of bitHolla blockchain platform, told Cointelegraph that the events of March 13 saw a major liquidation cascade take place on XBTM20 — an XBTUSD futures contract on the BXBT30M Index. In this regard, XBTM20 went way below its present prices by approximately 15%, and for some time, it appeared as though the drop was not going to stop. Beikverdi added:
“You can chalk this up to way too many overextended longs trying to predict the Bitcoin halving and couple that with the coronavirus panic and you got one gigantic trap. The timing was rather spot on when the market was panicking. Prices recovered soon after BitMEX shutdown. I don't think the XBTUSD perpetual swap would have gone to zero but watching XBTM20 market that really did look like it would never stop tanking.”
Offering his views on the matter, Jeffery Liu Xun, CEO of XanPool, a peer-to-peer fiat gateway, told Cointelegraph that the liquidations that took place on BitMEX created an increasing spread between the prices being offered by the platform and the spot prices at the time. In his view, people wanted to make use of this arbitrage opportunity, but as the spread kept increasing due to automatic liquidations, people got scared of BitMEX’s potential liquidity problems. Xun then went on to add:
“I guess BitMEX had to shut their circuit breakers because otherwise, the short whales could have pushed the price to zero through BitMEX’s automatic liquidation system. I think they shut it down too late because they probably had already lost a lot of credibility by then.”
Additionally, Xun also believes that if BitMEX hadn't shut down its systems, prices may have swooped down to zero, and they would have lost most of their customers.
BitMEX was not the only exchange to go down last week
While allegations of foul play by BitMEX are still being given some amount of credence by experts, Inal Kardanov, developer advocate for the Waves Platform, an open-source blockchain platform, told Cointelegraph that BitMEX was not the only big-name cryptocurrency exchange that has experienced such an outage during the crazy week. In fact, other platforms like Gemini, Huobi, Deribit and Bithumb also experienced similar issues:
“Stock exchanges suspend trading during massive drops, and it looks like we saw the same for BitMEX as well. Why should we expect different approaches from CENTRALIZED crypto exchanges?”
Kardanov also pointed out that BitMEX did not have any real reason to stop its liquidation engine if the firm thought that the market could collapse the XBTUSD order book. In this regard, he pointed to the performance of BitMEX's insurance fund that lost 1,627 BTC — which is only 4.6% of its total value — amid the intense sell-off that happened on March 13.
A somewhat similar opinion was also shared by Jeroen Van Lange, host of the Youtube channel “The Blockchain Today.” As he told Cointelegraph, such outages happen quite often, especially since certain exchanges can’t handle a lot of the activity that takes place during a huge crash or a pump. In his view, even premier trading platforms can process only a certain amount of trades per second, and if there is a lot of real-time activity combined with conditional orders, there will always be the possibility of a lapse occurring.
Van Lange also pointed out that BitMEX is well known for its “order submission errors,” which in layman’s terms means that the exchange is routinely faced with data overloads that cause its system to fail and thus don’t execute client orders. He believes that the platform is making use of depreciated technology and is thus unable to function properly under certain circumstances.
Additionally, while he does not believe that the exchange might have indulged in any sort of foul play, Van Lange added that there was an incentive available for the firm in regard to this entire scenario — since individual client sell-offs are executed through a market order and therefore, BitMEX stands to earn more fees from them.
Lastly, Beikverdi, too, is convinced that it's highly unlikely that BitMEX did anything malicious during the price crash. However, he pointed out that a poor explanation and transparency are not something that one would come to expect from a trading giant such as BitMEX — especially since a lot of people in the global crypto community rely heavily on the platform for price discovery. Beikverdi added:
“We have seen excuses like DDoS attacks used many times in the past by other tech companies to dodge questions. It's fair to expect a detailed official explanation from BitMEX on this matter.”
Traders have to be careful when dealing with certain exchanges
It is interesting to note that during the market turmoil that occurred between March 11–13, it was mostly centralized exchanges that experienced the most downtime. For example, trading platforms like Uniswap did not experience any outages, however, its Ether (ETH) gas prices skyrocketed around that period.
Also, even though traders on centralized exchanges, such as BitMEX, are required to understand the risks associated with using such systems, the amount of transparency and trust most crypto enthusiasts are looking for these days can ideally only be provided by decentralized platforms. In this regard, Kardanov told Cointelegraph:
“If traders expect transparency and want to trade without trust, they have to use decentralized exchanges. BitMEX uses other spot exchanges for its mark (index) price which is used for triggering liquidations. This is only the case for its perpetual markets like XBTUSD. Quarterly future markets like XBTH20 follow different rules, so messing up on calculations due to such an incident is possible.”
Van Lange, too, agrees with such an assessment and believes that people have to be extra careful with leverage trading when dealing with certain exchanges. He said that if an exchange has been embroiled in murky situations in the past, it would be best to stay away from it.