Bitcoin has been very volatile these past few weeks. It dropped to months low of $3,811 on March 13 and then started rising. Then it again formed a Death Cross on March 26, when the 50 DMA crossed down the 200 DMA. The Death Cross signaled that the price would go down in the short and medium-term. However, it started rising again. In fact, the BTCUSD reached the $7,200 level soon after. The unexpected price movement has left traders perplexed.
Let us delve a little deeper into how Bitcoin exchanges make money
The way the Bitcoin exchanges function is different from the way stock exchanges function.
- A conventional stock exchange earns a service fee for every trade that happens. Trading might have been facilitated directly by the exchange. It could also have been done by several hundreds of brokers or sub-brokers that are affiliated to the stock exchange.
- Most of the stock exchanges do not stand to gain from the loss or gain of any trade.
- Now, in the case of Bitcoin, there is no one single exchange that governs the trading of Bitcoins. The BTC exchanges themselves act as brokers or sub-brokers.
- Every Bitcoin exchange offers leverage to its clients. This leverage might vary from 5x to 100x. Leveraging is what is used by various exchanges to lure clients.
- The exchange earns a small commission on this leverage, of course.
How did the BTC exchanges benefit from the surge in prices?
Trades done with the leveraged capital leaves a trader extremely vulnerable to even minuscule swings in the Bitcoin prices. According to data from major Bitcoin exchanges such as BitMex and BitFinex, a majority of trades in the Futures were ‘long’ contracts. This happened as traders expected prices to rise.
And when the prices fell even by a small amount, the traders that had a ‘long’ contract would get ‘Rekt,’ and their position would get squared off. The squaring off caused a considerable number of traders to lose their money. However, the exchanges gained a lot out of it.
Liquidation of $90 Million worth of positions in BTCUSD
Traders lost more than $90 Million in the last couple of days due to the liquidation of their positions. In other words, traders lost vast amounts of money from the volatility, whereas the exchanges made millions of dollars.
