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The way that market makers work is they keep the price constant between the spot and derivative exchanges if the funding/futures is near flat. So to prevent a huge arbitrage event the market makers who got accounts on the index spot exchanges like Kraken, Gemini, Bitstamp and Coinbase they buy/sell to keep the index the same as the mark price.
So if there is a huge dump on fake leverage, they will follow and that's why its dangerous.
Until they run out of coins on spot exchanges and the algos shut down. This is why Bitmex hit the $3,500s when everyone else was in the $3,800s or $3,900s. There was not enough spot selling liquidity to keep prices in line.
This is where your whole "everyone will follow Bitmex to $0" theory breaks down.
Bitmex can go to $0. Other exchanges would just ignore them.
Most of the selling on Bitmex was due to long liquidations and it hit a low of $3596. And if you look at the spot exchanges like Kraken, Gemini, Bitstamp and Coinbase they hit a low of $3913, $3901, $3850, and $3858, respectively. So obviously the spot exchanges were following Bitmex.
That's not obvious at all! It's not how causation works either.
That only means long liquidations and lack of liquidity were causing Bitmex to diverge from spot exchanges. When derivatives diverge from the underlying, it's an obvious sign of problems on the derivative side. Basic logic says Bitmex XBTUSD
follows spot exchanges because its underlying price is
based on a spot index.Here is the thing, with Bitmex you can only withdraw once a day. So most likely the market makers did run out of coins to sell on spot exchanges and most likely shut off their algos. However what would of happened if they processed withdraws multiple times a day like most exchanges? Their algos would of been left on longer and they would of provided the missing bid liquidity and maybe prevented this crash. Maybe the issue for this is that they need multiple withdraw windows, especially for their market makers.
Also I think these days that most exchanges follow Binanace, it seems Coinbase has low volume most of the time while Binance USDT pair seems to be leading the market. Kind of like how Bitfinex was the market leader a few years back.