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Black Swans & Bitcoins: Trading Through the Coronavirus Crisis

Although there was quite a bit of debate over whether or not the coronavirus constituted a so-called “black swan” event in the early days of its spread, the continuous stream of border closings, regional and country-wide lockdowns, and widespread economic fallout that has resulted from the spread of the coronavirus seem to have proven the virus’s status as a black swan, indeed.

The term, which was popularized by Nassim Nicholas Taleb, a finance professor, trader, and author of Fooled by Randomness, describes a novel, unpredictable event that stretches beyond what is normally expected of a situation and has potentially severe consequences.

Because these events are so unpredictable, it is often the case that there is no precedent for what their consequences might be.

Crypto markets aren’t following any kind of predictable pattern

And this is precisely where traders seem to have found themselves–when the coronavirus began to spread around the globe, both traditional and crypto markets were seemingly in the midst of prosperous periods. Bitcoin had been finding its footing around the $8,000-10,500 range for the better part of a month (a significant period of time in crypto-land), and traditional stock and commodities markets, still boosted by the “Trump bump,” were steadily climbing.

However, when the virus started to spread, all of that came crashing down–and fast. With a few exceptions, many of the days over the last two and a half weeks have been some of the worst in the history of modern financial markets–including the Bitcoin market.

“There [was] so much leverage on margin trading that when people’s stacks get liquidated, it creates a locally lower point for the Bitcoin price than the global price,” Miko explained.

However, Miko also pointed out that a lack of dependable infrastructure in the space can make it difficult–or even impossible–to profit off of these local pricing phenomena. “the problem is that if your assets are stuck in that bubble, you’re unable to access the global price,” he said, which “creates more potential for panic-selling and those kinds of things.”

In a report on this particular type of phenomenon, Multicoin Capital’s Kyle Samani wrote that “during times of crisis, [exchanges] become so congested that arbitrageurs cannot keep prices in line across venues, causing massive dislocations on individual exchanges.” In one instance, “massive dislocations on a single exchange (BitMEX) caused Bitcoin to dip below $4,000 for 15-30 minutes; however, this would not have happened if the market operated correctly.”

Miko said that “the thing that’s interesting about it is that there’s an impedance mismatch between exchanges, because [the exchange] networks get congested–the networks themselves don’t move fast enough to enable arbitrage between networks,” so that when these kinds of “strong hits” come, “you’re not able to handle global liquidity.”

Therefore, “in a way, what’s happened here is that we have the strength of the underlying asset–which is custody and settlement–and then we have a weakness in the infrastructure above that,” which includes things like cryptocurrency exchanges. Therefore, in many cases, the potential for arbitrage between cryptocurrency exchanges remains unmet.


What are your strategies for trading through the corona crisis? We’d love to hear your thoughts in the comment below. None of the content presented in this article constitutes investment advice. 


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