Bybit Rises as BitMEX's Architectural Flaws Leave It Reeling

The March 12, 2020 Bitcoin price crash saw the cryptocurrency plummet from $7,900 to $3,600 in a matter of hours. This extreme volatility was largely driven by the collapse of over-leveraged longs on derivatives venues.

At the center of this storm was BitMEX, an exchange that had pioneered perpetual swaps and other derivatives products. However, its own infrastructure ultimately contributed to the chaos. The matching engine went dark for approximately 25 minutes, a failure that might have prevented Bitcoin from falling even lower.

The root cause of the problem lay in BitMEX's inverse contracts, which allowed traders to post Bitcoin as margin on positions denominated in Bitcoin. When prices fell, the value of all collateral declined simultaneously, accelerating liquidations and draining the exchange's insurance fund.

Although the forced outage may have inadvertently acted as a circuit breaker, preventing further losses from accumulating, its impact is still debated among industry experts. What is clear, however, is that BitMEX's decline marked a turning point in the derivatives market, paving the way for Bybit to capitalize on regulatory pressure and user dissatisfaction with the struggling exchange.

Bybit's decision to offer USDT-margined perpetuals addressed the collateral feedback loop issue, providing traders with more stability during periods of high volatility. The platform also boasted a faster interface, superior mobile experience, and innovative features like copy trading for retail users.