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Almost all Bitcoin Volatility Transmission Comes from Binance




The figure above shows the results of applying a state-of-the-art econometric model for identifying high-frequency volatility flows, to minute-level data from the largest and most important bitcoin products: Binance tether perpetual (red), Binance spot (green), Binance inverse perpetual (black), Bybit inverse perpetual (yellow), Huobi spot (light green) and Coinbase spot (blue). The circle plot indicates where the volatility arises and to which exchange it is transmitted. The vast majority comes from Binance’s tether perpetual, some comes from Binance spot, a bit spills over on inverse products from Binance to Bybit but virtually nothing comes Coinbase, Huobi or Bybit. See Figure 6 of Alexander, Heck and Kaeck (2021) “The Role of Binance in Bitcoin Volatility Transmission” available to download here.


Binance’s Dubious Practices

How will Binance react to the onslaught of pushbacks against their dubious practices? They care not a jot about regulators refusing them a license to operate a fiat-onboarding subsidiary in the UK, Canada, Japan, and numerous other countries. But the filing of a criminal action by the Thailand SEC will keep their lawyers busy, as will the avalanche of class actions coming their way because of the mysterious outages and contrary behaviour of their leveraged tokens on May 19. However, ever since Binance’s major advance into cryptoland started – 12 months ago – their overriding attitude has been to completely disregard any notion of responsibility to their customers.


The exchange ignores the established best practices of financial risk management, such as using an independent central counterparty clearing house. They re-invent the economics of trade, such as running their own monopoly of designated market makers. And their business model exploits the ignorance of the yield-starved, even moderately cash-rich, pensioners.


However, everything is starting to unravel now. Take what happened on May 19. To understand this, one should really go back to April 18, when the crypto flash crash catalysed massive auto-liquidations. My guess is that Binance’s insurance fund was emptied on April 18 and because of this, the long-side losses (on their vast array of highly leveraged perpetuals) could not be covered. There will have been massive, unreported, auto-deleveraging (ADL) of the winning short positions that were matched to the liquidated longs. And forced liquidations of those winning positions, at discounted prices, when ADL was not enough. To put this in context, there was $200 billion traded on just one of these perpetuals, BTCUSDT during the third week of May. The Binance bitcoin-tether perpetual has become the TVIX of cryptoland – and we all know what happened to the TVIX don’t we (if not, here’s a helpful link).


Of course, an empty insurance fund is nothing that an order for a few billion more tether couldn’t sort. Towards the end of May Binance ordered another $3 billion tether – then Tether attempted to cover it up by switching the order to Ethereum and feeding only TON data to coinanalyse – this is proved by watching my videos here and here.


The tether rich list shows about $17 billion tether in Binance’s hot wallet. With other hot wallets from Huobi etc. we can see the location of $40 billion tether. The location of the other $23 billion is obscure, but most of it ends up on Binance at some point, because how else are the US traders going to onboard to an exchange that doesn’t accept fiat.


Attention SEC and other US Regulators!

Look at Figure 2 on page 9 of the paper. It reveals how the daily pattern of trading volume peaks between 08:00 and 12:00 New York time. It is also clear that US traders run bots programmed to automatically bed-and-breakfast on Coinbase at the exact time of funding rate payments.


Even without all the exchange’s malpractice, when Binance gets busted this unbelievably large supply of tether will have a systemically destabilising effect. It won’t only be that US traders become unable to off-board their funds. It is obvious to me that Tether could not raise $63 billion if everyone decided to sell their tether at once. Even supposing Tether’s claims are correct, and they indeed hold $63 billion reserves mainly in commercial paper, those firms holding promissory notes from Tether couldn’t possibly get all get their money back at once. What is Wall Street doing, allowing a single, non-regulated off-shore entity with a record of highly suspicious activity to prop up the US money market? Maybe the Fed isn’t enough.


Actually, I suppose Tether’s reserves are mostly crypto backed, which makes the whole thing a massive Ponzi scheme. Then once the scheme collapses, since Binance is the major tether holder by far, it will indeed be “Bye-Bye Binance”. And good riddance.


What Happened at Binance on May 19?

This is an educated guess, no more. I’m assuming the Binance insurance fund was seriously depleted by the end of April, so by the time of the crash during the 3rd week of May they had nothing to compensate winning short positions. Their only resort was massive ADL and many forced liquidations. This is all part of their terms and conditions. But I have reliable reports that the order book went completely wild at 08:00 New York time. Then, shortly after 09:00 Binance took the entire order book down, for almost an hour. Nobody could exit losing positions and those with winning positions – especially on the DOWN tokens – also lost. Hence the class actions coming Binance’s way now.


Of course, Binance have covered their trail by changing the historical data. It looks like nothing happened on May 19 now, if you trace back in time using the Binance API. But plenty of people have recorded what really happened at the time. Well done them.




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