Why did Binance's rule change lead to a crash in Meme coins?
Today, some popular Meme coins like ACT suddenly plummeted, and many thought it was due to the market maker Wintermute going bankrupt. However, the real 'culprit' was Binance's adjustment of rules.
Although Binance issued an announcement in advance, the market reaction was more intense than expected. Why can a rule change cause Meme coins to crash? Let's break it down step by step.
1. What rules did Binance change?
This time, Binance adjusted the contract position limits and leverage ratios, primarily aiming to control risks and prevent excessive market manipulation.
Position limit lowered: For example, previously an account could open contracts worth up to $10 million, but now it can only open $5 million, and any excess must be closed.
Leverage ratio lowered: Previously, a leverage of 100 times was allowed, but it may now be reduced to 50 times, resulting in smaller positions that can be opened with the same capital.
This impacts market makers the most, as they typically rely on high leverage and large positions to maintain market liquidity.
2. Market makers forced to liquidate, contract prices drop
Market makers usually hold both spot and contracts simultaneously to hedge risks. But with the new rules:
Contracts exceeding the position limit must be liquidated
High leverage positions must be reduced
If market makers had opened many long positions before, they can now only sell part of them. A large number of sell orders hit the market, and contract prices naturally fell.
3. Disconnection between spot and contract prices, widening price difference
Under normal circumstances, spot and contract prices do not differ significantly, as arbitrageurs ensure they remain close. But this time it was different:
Contract prices plummeted (because market makers were selling)
Spot prices have not reacted yet and haven't dropped as much
As a result, spot prices became much more expensive than contracts, and the price difference suddenly widened.
4. Arbitrage bots, spot prices also fall
There are a large number of arbitrage bots in the market that specifically capture these price difference opportunities:
Buying contracts at low prices (because contracts have dropped significantly)
Selling spot at high prices (because spot hasn’t dropped yet)
The result is: bots frantically sell in the spot market, causing spot prices to drop as well.
5. Vicious cycle: Retail panic accelerates the decline
At this point, the market is already in chaos:
Market makers are selling contracts
Bots are selling spots
Retail investors see the prices plummeting and also start panic selling
Ultimately, Meme coins crash completely, with prices halved or even lower.
