The price of bitcoin declined to its lowest level since May yesterday, falling nearly 10% and ending what had been a long period of relative optimism and stability for the global bitcoin market.
But while there were many theories as to what news events could have caused bitcoin’s value to fall into such a steep decline, some market observers believe that this most recent movement may have been caused not by external factors, but by the actions of bitcoin traders.
This theory, perhaps most notably posed by Raffael Danielli, posits that out-of-control margin trading caused a flash crash in at least one major bitcoin exchange market, a development that had a cascading effect across the larger bitcoin market.
In the post on his quantitative analysis blog Matlab Trading, Danielli asserts that margin traders, specifically those on Hong Kong-based bitcoin trading platform Bitfinex, had invested significant funds into long positions as bullish sentiment rose in July.
Speaking to CoinDesk, Danielli elaborated on his post, suggesting that initial positive sentiment about New York’s proposed bitcoin regulation had a profound impact on the digital currency trading community, but that it was how investors acted on this information that proved problematic.
Danielli explained:
“[Positive sentiment about US regulation] resulted in large buying activities and traders on Bitfinex started to borrow as much money as they [could] to buy more bitcoins and increase their position in anticipation of a market upswing. As it turned out, New York’s proposed bitcoin regulations are more on the harsh side and the European banking authority also decided to take a very cautious approach.”
He concluded: “In other words, many traders were caught on the wrong foot and today they paid the price.”
The rise of bitcoin margin trading
Margin trading allows investors to borrow money from brokers, funds that are then leveraged by borrowers to trade on the outlook of bitcoin. Borrowers can then place bets on how they believe the market will perform, going either ‘long’ or ‘short’ depending on whether they think the price of the asset will rise (long) or fall (short).
When margin traders close their position, they return the original principal to the investor, plus any agreed upon interest, and the borrower is assessed a profit or a loss.
While a mainstay of major traditional markets, margin trading is relatively new to the bitcoin ecosystem. China’s largest bitcoin exchange OKCoin introduced its margin trading service this June, while Bitfinex opened its offering in June of 2013. BTC-e, another major Europe-based exchange, also offers the service.
Though he is a critic of margin trading, Danielli was quick to point out that the practice is not something that’s unique to the bitcoin ecosystem.
“All major exchanges in the world such as NASDAQ, NYSE and BATS have to deal with similar events like the one we observed today.”
Proponents of margin trading assert that the trading option provides experienced investors with the chance to gain significant profits, provided they properly gauge the risks associated with their borrowing.
for more you can read here http://www.coindesk.com/margin-trading-crash-price-bitcoin/
