The rocky financial markets have seen “circuit breakers” activate numerous times in the past week. This mechanism, which intends to stop a market crash, is common when trading stocks, even though it rarely activates. The crypto markets, however, do not have circuit breakers – until now, that is.
Huobi introduces crypto circuit breaker
Specifically, the cryptocurrency exchange Huobi is now looking to introduce a crypto circuit breaker of sorts. This liquidation mechanism will, much like a stock market circuit breaker, suspend trading if prices become too volatile under a short period of time.
Huobi said that its new mechanism, which will be part of Huobi’s crypto derivatives marketplace, could halt all ongoing liquidations. This dramatic measure intends to stop any mass-liquidations from plummeting the market during panic sell-offs.
However, the press release announcing the new liquidation mechanism does not mention when it would kick in. The New York Stock Exchange, in comparison, has a circuit breaker that first activates when the exchange drops more than 7%.
Huobi, on the other hand, does not specify at which drop level this crypto circuit breaker would activate. Rather, it states that it would “systematically minimize user exposure during times of severe market volatility”.
Do circuit breakers belong in crypto trading?
One should also keep in mind that this crypto circuit breaker is only coming to Huobi’s crypto derivatives marketplace. As such, it mainly relates to futures contracts. According to Huobi, this market is especially in need of this sort of mechanism:
“Futures contracts allow users to speculate on the future price of underlying assets, but may also result in unnecessary exposure. In traditional futures trading, liquidation is triggered in full at the moment a user’s margin ratio is equal to or less than zero, which means sudden market swings can immediately liquidate highly leveraged positions and cause extensive user losses.”
The “circuit breaker” is not everything that Huobi is introducing. In addition, it is also rolling out something that’s not a full “pause” mechanism like the New York Stock Exchange’s circuit breaker. Instead, it gradually reduces a user’s positions instead of a direct liquidation. This “partial liquidation” will continue until a user’s margin ratio reaches zero.
Circuit breakers are somewhat controversial in the crypto community, as they arguably interfere with a “free” cryptocurrency market. As such, it will be interesting to see whether this spreads to other cryptocurrency exchanges in the coming weeks and months.
Rasmus Pihl is a writer for Toshi Times by day and an avid follower of the blockchain industry by night. Rasmus holds a Bachelor’s Degree in Marketing from the Gothenburg School of Business, Economics, and Law and runs a Swedish marketing consulting firm. Moreover, when he isn’t writing for Toshi Times, traveling, working or changing the world in some other capacity, Rasmus is more than likely caught up in postgraduate studies.