Bitcoin Whale Unable to Cover Huge ‘Wrong’ Bet, Traders Suffer
A huge wrong-way (Long) bet on Bitcoin left an unidentified futures trader unable to cover his/her losses, burning counterparties and threatening to dent confidence in 1 of the world’s largest cryptocurrency venues.
The long position in Bitcoin futures listed on OKEx, a Hong Kong-based exchange, had a notional value of about $416-M, according to an OKEx statement Friday.
While OKEx moved to liquidate the position Tuesday, the exchange was unable to cover the trader’s shortfall as Bitcoin’s price slumped. Because OKEx has a “socialized clawback” policy for such instances, it will force futures traders with unrealized gains this week to give up about 18% of their profits.
While clawbacks are not unprecedented at OKEx, the size of this week’s trading debacle has attracted lots of attention in crypto circles. The episode underscores the risks of operating on lightly regulated virtual currency venues, which often allow high levels of leverage and lack the protections investors have come to expect from traditional stock and bond markets.
Crypto platforms have been dogged by everything from outages to hacks and market manipulation over the past few years, a period when spectacular swings in Bitcoin and the other cryptos attracted hordes of new traders from all over the world.
“Everyone is talking about it”.
The exchange, which only identified the problem trader by the ID number 2051247, said the position was initiated at 2:00A Hong Kong time on 31 July.
“Our risk management team immediately contacted the client, requesting the client several times to partially close the positions to reduce the overall market risks,” OKEx said.
“However, the client refused to cooperate, which lead to our decision of freezing the client’s account to prevent further positions increasing. Shortly after this preemptive action, unfortunately, the BTC price tumbled, causing the liquidation of the account.”
The exchange said it injected 2,500 Bitcoins, worth about $18-M at current prices into an insurance fund to help minimize the impact on clients.
OKEx, which requires traders to pass a quiz on its rules before they can begin investing in futures, also outlined planned changes to its margin system and liquidation procedures that it said would “vastly minimize the size of forced liquidation positions” and make claw-backs less frequent.
The exchange allows clients to leverage their positions by as much as 20X.
Claw-backs are unique to crypto markets and expose the exchanges who use them to reputational risks when clients are forced to absorb losses, it is a weird mechanism.
Bitcoin, the biggest cryptocurrency by market value is currently trading at 7,408.0049,+68.0098, or +0.93%, at the close: 1:05a BST, the market is closed
Bitcoin is off 48% YTD