After spending September in stablecoin mode, Bitcoin has opened October with two volatility-inducing events in as many days.
First, BitMex, the largest crypto derivatives exchange globally, was charged by the CFTC with illegally operating a cryptocurrency exchange and AML violations. Crypto markets promptly sold off on the news, but later in the day, they started staging a comeback.
The bounce was short-lived, however, as Donald Trump confirmed he had tested positive for COVID-19 in a moment of you can’t make this stuff up surrealism. His positive test sent global markets into a tailspin except for gold, which flew upwards on the news.
Is BitMex going bust?
In previous years, an exchange of BitMex’s stature fielding such substantial criminal charges from the CFTC would be enough to instill shock and awe in the crypto market.
Between BitMex’s three co-founders, one has was arrested (Samuel Reed), while the remaining two, including crypto-famous Arther Hayes, have arrest warrants out. The Hong Kong-based exchange has long been a haven for degen crypto traders, including Hayes himself, who often tweets about high-leverage gambles.
According to the New York Times, BitMex has routinely cleared $1.5+ billion in daily trading volume during recent months, indicating just how much of an ecosystem pillar the exchange is.
The crux of the issue is BitMex has let users trade without KYC checks for years. According to US authorities, the lax attitude towards identity verification has allowed untold amounts of money laundering to occur on the exchange.
How does this affect you, the retail crypto trader or investor?
- In the immediate term, there’s clear confusion about whether BitMex will face closure or go offline for any period of time. BitMex says it’ll continue as usual, but any threat to the operations of a top five crypto exchange should be closely monitored.
- Traders keeping funds on the exchange will seek to remove them lest they get caught out. As of the time of writing, 19% of BitMex’s BTC funds have already left the exchange, with 60%+ of that liquidity going to other exchanges. Whether this means some will liquidate positions back to fiat, continue trading elsewhere, or simply HODL is unknown, but volatility is likely.
- Implications for other exchanges may exist. Uniswap, a decentralized swap protocol with no KYC measures, handles larger exchange volume than Coinbase. It can conceivably face similar pressure from regulators.
Trump gets COVID, time for a risk-off?
In a tweet heard ‘round the world, Trump announced he had tested positive for COVID-19 after months of downplaying the virus. Rather than dwell on the poetic justice of the event, markets immediately dumped as uncertainty on the world stage flared up once more.
Global markets are hanging by a paradoxical thread of continuously grim geopolitical and economic data paired with resilient investors who refuse to go quietly into the night. However, the question on the mind of economists everywhere is how much longer investors’ cognitive dissonance can last.
Trump’s positive test may be the straw that breaks the camel’s back — that is unless lawmakers can hurry back to the table to approve a stimulus deal ASAP. The fact that stimulus bills are all that’s propping legacy markets near bull market highs is undisputed. What isn’t known is how much longer the money printer can go brrrr before reality catches up with the market.
With an extremely contentious election only a month away, COVID cases surging worldwide, and mass layoffs across key sectors boiling to the surface, the time for taking risk off the table is likely nigh.
For crypto investors, the question is what — if any — effect will this have on digital assets like Bitcoin, Ethereum, and DeFi products?
- At the time of Trump’s positive test announcement, a negative correlation between bitcoin and gold appeared as the latter mooned while the former dumped.
- Legacy stocks and the cryptocurrency market remain highly correlated. However, that correlation appears to soften when legacy markets close during the week and on weekends.
- Risk-averse investors will have a difficult time justifying entry into a risky asset class like crypto.
- Volatility is likely to ensue during the month leading up to the US elections.