Nobody can really predict Bitcoin’s (BTC) price volatility. But one thing is becoming painfully predictable when the price of Bitcoin suddenly lurches in one direction or another: One or more of the major cryptocurrency exchanges simply goes offline. This leaves users powerless to prevent losses from spiraling, as they are left unable to trade or buy more positions as a hedge.
These outages have happened time and time again. Most recently, as Bitcoin started climbing toward the $10,000 mark, Coinbase went offline. At the time it happened, Cointelegraph reported that this is the fourth time in the last three months that Coinbase has shut down during major moves in the price of BTC. Additionally, Twitter user CryptoWhale pointed out that there have been no fewer than 11 Coinbase outages over the last 12 months, each one coming at a time when Bitcoin’s price had moved more than $500 in value.
The Silicon Valley-based exchange later issued a statement via its blog, clarifying that the June 3 outages were due to an issue with its API, which was seeing five times more traffic than usual. Without directly addressing the issue of the frequency of outages, the blog post stated that Coinbase is “working on reducing the impact of price-related traffic spikes though pre-scaling and caching.” Meanwhile, the exchange saw users withdrawing BTC en masse, following the incident.
A broader problem?
During March’s Black Thursday, BitMEX went offline for 25 minutes, subsequently blaming two separate distributed denial-of-service attacks. However, Twitter users, including the CEO of rival exchange FTX, Sam Bankman-Fried, and trader lowstrife, called foul play.
BitMEX denied the allegations, but it’s not the first time that the Seychelles-based exchange has been accused of playing dirty. Blogger Hasu aired his suspicions that the company “weaponizes their server problems” back in 2018. This issue is also clearly set out in the form of allegations in the class-action lawsuit currently pending against BitMEX, which states: “BitMEX routinely freezing its servers — which BitMEX blames on technical glitches and limitations — to profit from moments of high volatility.”
A month after Black Thursday, the company saw a drop of 38% in its Bitcoin holdings. It is unclear whether the drop is due to users losing trust in the platform or because of the overall market sentiment, whereby an abnormally high amount of BTC is being withdrawn from exchanges. Meanwhile, BitMEX has struggled to regain the open interest lost in March, implying that it may be losing market share to its smaller rivals, such as Bybit and FTX.
Coinbase and BitMEX are the two platforms that have most often come under fire for downtime in volatile markets. However, data provider Kaiko performed an in-depth analysis of the minute-by-minute trade data for March 12 and 13, covering seven spot and six derivatives exchanges. Five of the spot venues and four of the derivatives platforms were found to have experienced some kind of issue during peak moments of volatility.
Of the spot platforms in question, only Binance and Bitstamp held up, although Binance CEO Changpeng Zhao acknowledged some “glitches on peripheral systems” in a tweet. In derivatives, Binance Futures and Huobi DM managed to ensure uninterrupted trading.
A problem unique to crypto?
Contrary to the crypto sphere, there are no regular instances of the traditional stock markets going down during peak trading hours. Of course, the stock markets don’t see the same volatility as cryptocurrencies, but they do handle trading volumes that are far greater than any crypto exchange. The biggest cryptocurrency exchanges have enough experience of Bitcoin’s volatility to be able to anticipate certain kinds of peaks.
Arguably, some big exchanges also have money to invest in building infrastructure that can handle the kind of volume spikes. Coinbase has raised over half a billion dollars over its lifetime. It could be argued that BitMEX is a minnow, by comparison, having raised only $25,000 with the last seed round in 2015. However, one analyst estimates that BitMEX is raking in around $700,000 per day in fees from its derivatives trading service, which could come to over $250 million each year. Joel Edgerton, the chief operating officer of bitFlyer USA, believes that the issue is one of industry maturity, telling Cointelegraph:
“Crypto exchanges do not have the deep institutional experience that is in a traditional stock exchange. Traditional exchanges have had over 100 years to build the skills, processes and systems needed to handle the volumes they receive.”
Different exchanges appear to have different views on what could be an appropriate fix for the downtime problem. Bitfinex has recently issued a press release boasting its own performance in 2020, stating that it’s had no major incidents of downtime so far this year. The exchange points to its “obsessive interest in technical improvement” as being the reason why it has managed to achieve this.
Other exchange leaders seem to agree unanimously that the focus should be on the technology above all else. Edgerton explained that bitFlyer was built in Japan by specialists from Goldman Sachs and undergoes continual rigorous performance testing. On the matter, Catherine Coley, the CEO of Binance.US, pointed out to Cointelegraph that:
“Our infrastructure is built to regularly handle over $10 billion of daily trading activity. We have capacity for much larger volumes before our systems would become stressed.”
Stephen Stonberg, the COO of Bittrex, believes that many exchanges may be underestimating the effort and expertise involved in building an exchange that can withstand high volumes during peak times. He told Cointelegraph: “We can say with certainty that building a rock-stable exchange is harder than it looks.”
While it seems acceptable enough that the crypto industry simply isn’t developed enough to handle high volatility at peak yet, the debate still rages over whether the industry should implement circuit breakers. Meanwhile, some have accused exchanges of using their downtime as a form of a hidden circuit breaker.
Several platforms that have suffered from outages, including Robinhood and Gemini, don’t offer leveraged trading. Furthermore, both Coinbase and Gemini are regulated in the United States. Therefore, it would be a stretch to assume that the platforms take their services offline deliberately. If anything, spot exchanges risk losing out on the fees from users who would happily dump their holdings at market rates instead of setting a limit order.
Edgerton cautiously told Cointelegraph that there could be two reasons behind the outages: “In one theory, an exchange has lost focus on the cryptocurrency community and is trying to become a financial conglomerate with a hand in every pot.” He added: “In this case, frequent volatility-caused outages are the result of not taking care of the basics.” But it may also not just be about inadequate systems, as he elaborated on another potential theory:
“Some exchanges are closer to a casino business model than an exchange one. Volatile assets like Bitcoin do not need 100x leverage, especially when marketed to retail customers. Additionally, some of these exchanges may actively avoid regulation or not clarify where their business really exists. In these circumstances, it is reasonable that people would question mysterious outages as a hidden circuit breaker that is putting the company’s interests ahead of their customers.”
Users demand better systems and transparency
This year’s volatility has been extreme, even by Bitcoin’s standards. It’s also worth remembering that there are more traders, exchanges and general interest in cryptocurrencies now than at any point in the past. So, in a way, it’s no surprise that the infrastructure of some exchanges has started to creak and groan under heavier loads.
However, transparency is also critical. In traditional markets, regulation forces transparency. In crypto, only some exchanges have chosen to be regulated in order to operate in particular markets. In the absence of regulation, it’s reasonable to expect a certain degree of transparency from exchange operators, particularly regarding how they handle costly issues such as liquidation during volatility. In a crowded market, traders will vote with their feet, so it’s up to the crypto exchanges to meet transparency demands and system stability.