The world of futures is risky to say the least and this is especially the case when you look at Bitcoin and the way that it is trading. The whole concept is still very new even for the traditional investor and it only opened up in December last year. This is when CME and CBOE launched their products into the market and this is said to be a big boost for both Bitcoin and the adoption that is eventually going to hit the mainstream market. If you are involved in cryptocurrency at the moment then you will see that there have been plenty of opportunities to be had and that it is very easy to trade Bitcoin futures. When you look at the other futures that are available you will see that before the launch dates, they had a boost to try and get them accepted on the market. The problem is that even with this jump, OKEX has still had its own fair share of issues. To begin with, there was the abnormal pricing. This happened on March 30th and they also brought a threat with them as well. They stated that they would try and attempt suicide if the issue was not sorted out.
On top of that, in May, OKEx had to deal with the new CNR radio rule. This alleged that OKEx were trading futures illegally and this banned all usage of any cryptocurrency within the border. Now OKEx was faced with a very difficult situation. A whale’s trader had a wrong-way bet on Bitcoin and this forced a liquidation of the contracts that were present. They then forced the other traders to try and foot the bill. This issues mean that those who had unrealised gains on their short positions had to lose out on well over 18% of their profits. So Andy Cheung who is the head of operations for OKEx has come out to say that this has been a very valuable lesson and that they are going to try and improve the valuable trading experience. Cheung has suggested that there hasn’t been much fallout from their clawback and that there hasn’t been much damage done to the sentiment for trading.
Cheung has been forced to put this liquidation of a misjudged Bitcoin future trade down tot a bad decision on the trader’s behalf. On July 31st there were reports of an anonymous trader and that they triggered the risk management alert system. This happened when a long position was placed and it contained over 4,168,515 contracts. When you look at the sheer size of this and the position that they were in, the exchange then contacted the trader and asked them to try and partially close the positions so that this would reduce the amount of risks that it exposed the market to. The client then refused to corporate which means that they had to freeze the account. This would then stop any of the other positions from increasing. Shortly after they took the action, the price for the BTC tumbled and this caused the entire account to be liquidated. The ramifications of this liquidation means that the counterparts are being left to try and foot the bill but this is known as a socialised clawback. This happens when cases for a trade shortfall occur. OKEx have a defined policy which is done when any kind of liquidation happens, so it’s not like they came up with the idea on the spot.
According to their team, they have a full account clawback system. This works to try and calculate the clawback rate. The margin for the system calls for the losses from the contracts to be merged and when this happens, the clawback will then be calculated according to the amount of profit that each account is making. Only users that have a profit across three contracts will be subject to the clawback and they will only occur if the insurance does not cover the system’s total margin.
In order to try and mitigate some of the risk, OKEx then pumped 2,500 BTC into some kind of insurance fund. This however does not cancel out any of the damages. Even though this is going to be negative for the world of Bitcoin., the expenses that the counterparts are left to foot are apparently all down to one trader’s bad decision. Cheung has stated that there hasn’t been any lasting damage done. They have based it on their own data. They stated that they do not see any signs of the market being affected by this incident and that they do not see any signs of their customers being affected either.
So a lot of what happened did fall out of OKEx’s control. The outlandish trade and the fact that it is so volatile is a lesson that we all need to learn. OKEx also need to learn from this lesson as well. OKEx have even said that they need to understand the mechanisms that are happening behind the scenes as well. They want to say that this is a valuable experience for themselves and they also encourage their customers to learn everything that they can about the system before they choose to invest so that they won’t lose out on anything.
So when you look at the clawback mechanism you will find that this is an unknown danger for future traders who want to try and rush into things. OKEx have made it clear time and time again that this is the price that you need to pay if you want to invest.
So the clawback mechanism has operated for quite some time now and it has been running smoothly ever since the whole thing started out. It is being adopted by a ton of major exchanges that are present. BitMex adopt a similar de-leveraging mechanism and this closes off any liquidation orders via giving counterparties and the position that they hold leveraging priority.
They believe that this mechanism balances out the interests between everyone who is involved but this does help to stabilise the platform operation. It also insures the assets of the traders who are on the platform. Without this mechanism however, traders would have to shut down their assets and everything would unfortunately vanish.
That being said, it really is somewhat of an unfortunate thing that traders of today are having to deal with. If another trader makes a bad move then everyone has to pay for it. Cheung has stated that they are trying to make things like this from happening and they are also trying to tone down the amount of things that happen as a result of this. They are also trying to eliminate the risk of a large-scale clawback from happening as well. They are also trying to enhance the education of futures and the trading that they are going to offer all of their users. This is so that they can understand the mechanism behind everything that is happening and also so that they are able to make good decisions as well.
So future trading in Bitcoin and other cryptocurrencies for that matter have a long way to go. This is before the whole thing can be considered fully fail-safe. Even then, by the looks of things a lot of things need to happen in order to get a good result out of the system and who knows what is going to happen if nothing is done about this.