312 One-Year Anniversary Review: How did the dark day that almost killed Bitcoin happen? Will it happen again?

Wu Shuo Author | Liu Quankai

Editor of this issue | Colin Wu

Today is March 12, 2021, the first anniversary of the "312" incident. Unknowingly, the cryptocurrency world has gone through another year, but the shadows brought to investors by March 12 and 13, 2020 have not yet dissipated.

(Data source: Trading View)

On March 12, 2020, according to Binance data, Bitcoin fell from a high of $7966.17 to a low of $4410. On March 13, it reached its darkest moment, falling to a low of $3782.13. The maximum drop in two days exceeded 50%, while Bitcoin had just returned to $10,000 in the previous few weeks.

At that time, the global economy was in recession due to the epidemic, and no investment target could be immune. Investors regarded Bitcoin as a safe-haven asset, but it is obvious that Bitcoin was not immune to the economic crisis. Dating back to mid-February to early March, Bitcoin had already experienced a period of downward adjustment.

The uncertainty of the epidemic, the wave of corporate bankruptcies and the increasing economic burden caused panic in the macro-emotions, which then quickly spread to major financial markets around the world, exacerbating the market liquidity crisis. Investors are eager to cash out from the underlying assets to alleviate or cope with current or future living costs or use the assets to make up for margin calls on other assets. The risk transmission path of the financial market is roughly: A-shares-US stocks-gold-Bitcoin.

The data above are domestic epidemic data on February 1, 2020. At that time, the domestic epidemic was more severe than that abroad and was spreading rapidly abroad.

The epidemic first broke out in China on a large scale, and the A-share market took the lead in falling. According to Tiger Trade data, the first time the Shanghai Composite Index and the Shenzhen Composite Index fell sharply was from January 23 to February 3, forming a huge gap in prices. The second large drop occurred from March 6 to March 19, which was also the time period when the US stock market fell widely.

Market panic spread to the U.S. stock market in late February, as the epidemic abroad began to show. From February 21 to March 23, the three major U.S. stock market indexes experienced a month-long plunge. At the same time, the U.S. stock market also set an alternative milestone record, triggering circuit breakers four times, on March 9, March 12, March 16 and March 19.

During the first sharp drop in the A-share market and the first half of the sharp drop in the US stock market, gold was still on a steady upward path, which shows that gold can indeed play a good role as a safe-haven asset. However, in the face of the economic crisis, gold was still sold in large quantities, and investors relied on gold liquidity to make up for the positions of other underlying assets such as stocks that were depleted of liquidity. On February 28, gold experienced its first large intraday drop, and then from March 10 to March 19, the price of gold plummeted.

(Data source: Trading View)

Similar to gold, Bitcoin, due to its good liquidity, tenaciously withstood the collapse of other financial markets in February. However, in March, due to the continuous decline of the three major US stock indexes for many days, a considerable number of investors faced a liquidity crisis. In order to meet the demand for margin calls on other underlying assets, assets with good liquidity such as Bitcoin and gold were sold in large quantities, and the market price fell sharply. In addition, the sharp drop in the prices of crude oil, bonds, futures and other markets during this period exacerbated the volatility of Bitcoin.

Although the collapse of major financial markets can be seen from the K-line chart, it is important to understand that the sharp drop in the price of any target market is not simply a result of risk transmission over time. It is caused by the combined effects of various market factors over a period of time.

The successive collapse of the prices of underlying assets in the financial market is also the successive collapse of the confidence and expectations of investors in various markets. According to CryptoQuant, the average number of bitcoins transferred by miners to all exchanges, in the past year, there has never been such a large number of bitcoins transferred to exchanges by miners as on March 12 and 13 last year. With the deterioration of the macro economy, the consensus on Bitcoin's risk aversion has gradually been disintegrated by the exhaustion of stock market liquidity, and the bull market expectations after the halving have become confusing. The confidence of miners in holding coins for a rise has been shaken, and they are seeking to sell on exchanges.

(Data source: CryptoQuant)

The highly leveraged structure of the cryptocurrency market encounters extreme market conditions. When a series of long contracts are liquidated, the liquidation leads to mutual collapse, accelerating the price drop. In particular, when positions with small margins and high leverage or large contracts are liquidated with huge book losses, it is more likely to accelerate the collapse of Bitcoin prices. Although most exchanges have taken the "unplugging" operation to stabilize the currency price due to the price plunge and the almost emptied entrustment ledger, the most famous one is BitMEX. According to Datamish.com data, BitMEX liquidated long contracts worth $1.2 billion on March 12.

Twitter user Lowstrife, a cryptocurrency trader, pointed out that when the price of Bitcoin reached $4,000, there were only $18 million in buy orders on BitMEX, but there were still $200 million in sell orders in the contract liquidation engine.

In order to prevent a further drop in prices, BitMEX took the "offline" action to suspend liquidation and used the exchange's insurance to eat up the liquidated orders to stabilize the market. Bitcoin subsequently rebounded slightly. Some people say that it was BitMEX that saved Bitcoin by pulling the plug.

It is not just the high leverage of exchange contracts, the DeFi lending market is also to blame for this crash. DeFi facilitates investors to issue loans, and they can use Ethereum as collateral to earn interest. According to DEFI PULSE data, on March 12, 2020, 2.758 million Ethereum was locked in the DeFi market. When the price of Ethereum fluctuates violently, a large number of loans are at risk of being liquidated. Because the price fluctuated violently in a short period of time, many investors were stuck in the Ethereum network for almost a period of time, and they had no time to transfer their assets, which undoubtedly further increased the stampede effect.

Will history repeat itself?

Back to today, March 12, 2021, the Bitcoin market also experienced a sharp correction not long ago. A careful comparison shows that the decline actually has certain similarities:

Around March 12, 2020, affected by the epidemic, market panic spread roughly from A-shares, US stocks, gold, and Bitcoin, and financial markets such as crude oil, commodities, and futures all collapsed. Major countries and regions, led by the United States, Japan, and Western Europe, printed a large amount of money to save the market. With the stability of the US stock market and the recovery of the global financial market, US technology stocks have ushered in stability, rebound, and new highs.

(Data source: Trading View)

Two to three weeks before March 12, 2021, the 10-year U.S. Treasury yield soared to 1.622% due to concerns about the Federal Reserve's early exit from monetary easing, rising inflation expectations, and the repair of economic fundamentals. The core assets of A-shares, led by liquor, Nasdaq technology stocks, gold, Bitcoin and other risky assets all experienced a sharp pullback.

However, in the previous period, the U.S. House of Representatives passed the Biden administration's $1.9 trillion anti-epidemic economic rescue plan, and the Federal Reserve will continue to implement loose monetary policy. There is reason to believe that enough funds will flow into the Bitcoin market. At present, Bitcoin has returned to a trillion-dollar market value and is actively rebounding.

The entry of institutions and listed companies has been a booster for the Bitcoin market in the past year. Some time ago, Meitu announced the allocation of Bitcoin and Ethereum, saying that it saw the future of cryptocurrency assets and made preparations in advance to enter this technology field. Institutions enter the market to invest in the certainty of the future. In the context of the continued massive money injection by central banks led by the Federal Reserve, the inflation of fiat currencies has been continuously expanded by institutions because they value the role of Bitcoin as a hedge asset against the continued depreciation of the (US dollar) fiat currency.

On March 12, 2020, we saw the dangerous side of this immature market, and the risk factor of 312 has not been eliminated. But at the same time, Bitcoin also taught us a truth: whatever doesn't kill you will eventually make you stronger.

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