Bitcoin's futures trading world for the traditional investor is still very new, as it was only opened in December last year when CBOE and CME launched their products on the market in what should have been a great incentive for the adoption of Bitcoin.
However, for those who are already involved in cryptocurrencies, there have been opportunities to trade futures on Bitcoin – along with other cryptocurrency futures – from before the major launch dates of CME and CBOE. In fact, OKEx announced its futures trades on BTC, BCH and ETH on 3 November 2017.
But, even with this jump in the futures market, and being the second largest exchange of cryptocurrencies in volume, OKEx has had his problems with futures trading so far. First, on March 30 they had an abnormal price they had to face, bringing with them a threat from a trader who would attempt suicide if the issue had not been resolved.
Then, in May, OKEx had to deal with China "National Radio" (CNR) "Voice of China" program claiming that OKEx illegally traded cryptocurrency futures in the country, which practically banned the use of all digital currencies within its boundary.
Now, on August 3rd, OKEx faced a sticky situation in which a wrong bet on a "Whale" trader on Bitcoin forced the liquidation of a futures contract, forcing other traders to pay the bill. The last number means that those with unrealized gains in their short positions this week are destined to lose 18% of their profits.
Speaking to Cointelegraph, OKEx's chief of operations, Andy Cheung, said that this was a "valuable lesson" for him and OKEx, as they continue to try to improve the trading experience. However, Cheung also admits that there was a triumph of the clawback mechanism, nor damage to the sentiment of futures trading.
The bad decision of a trader
Cheung put this forced liquidation of a failed Bitcoin futures trade – with a notional value of $ 416 million – up to "just a bad decision of a trader".
On July 31, an anonymous trader activated the OKEx risk management alert system when a long position was placed that contained a number of 4,168,515 contracts. Because of the size of the position, the exchange contacted the trader and asked several times to "partially close positions to reduce overall market risks".
"However, the customer refused to cooperate, which [led] has decided to freeze the client's account to avoid further positions [from] on the rise. Shortly after this preventive action, unfortunately, the price of the BTC has collapsed, causing the settlement of the account, "reads the official statement
. The ramifications of this liquidation mean that the counterparts are left on foot, due to what is known as a "socialized clawback" policy for cases where a trade deficit occurs
OKEx has a well-defined policy on this that is done when a forced liquidation occurs, states:
"OKEX Futures uses a complete clawback system account to calculate the clawback rate.The loss of marginal calls of the system from all three contracts will be [be] merged and clawbacks will be calculated based on the profit of the entire account of each user, instead of separately calculating the loss of marginal calls from each contract and clawback.Only users who have a net profit on all three contracts for that week will be subject to clawbacks Clawbacks occur only if the insurance fund does not have sufficient funds to cover the total call losses of the margin of the system. "
To try to mitigate some of the losses, OKEx immediately pumped 2,500 BTC (about $ 18.5 million) into an insurance fund." However, this was not enough to wipe out the damage.
Despite this negative instance for the Bitcoin futures trading, as well as the expenses that the counterparts are left to walk after the "bad decision" of this anonymous operator, Cheung says that there was
"From our data, we see no sign of the market sentiment influenced by this incident. We also see no sign that our customers' feelings are strongly influenced. "
Learning a Lesson
While a lot of what was happening fell out of control of OKEx, like the extravagant trade and the volatile Bitcoin movement that forced liquidation, OKEx says it's It was a valuable lesson for themselves, but it also encourages futures traders to understand the mechanisms.
"I would say this is a valuable lesson for us in improving our trading experience. We always encourage our customers to study the mechanism behind futures trading before joining the game to avoid unexpected losses. "
The mechanism of clawback is one that seems to be an unknown danger for futures traders rushing into things." However, OKEx has made it abundantly clear that this is the price to pay in some unfortunate circumstances.
"The clawback mechanism was performed in an orderly fashion from [it] and is widely adopted by major exchanges around the world. Another important exchange involving margin trading, BitMEX, also adopts a similar auto-deleveraging mechanism, which closes liquidation orders for the deleveraging of counterpart positions based on profit and leverage priority.
"We believe that this mechanism balances the interests of all parties involved.This mechanism not only stabilizes the operations of our platform, but also ensures the resources of operators on our platform.Without this mechanism, any trading platform will risk extinguishing along with all the goods of the operators. "
However, it is an unfortunate thing for traders to have to deal with a bad move by another trader, and for this, adds Cheung, they are trying to make them less frequent and less expensive.
"That said, we are working hard to eliminate the risk of a large-scale clawback in the future, and we have already initiated a number of improvement measures before this incident happened, and we will also improve the education of future for our users, so that they can fully understand the underlying mechanism and will be able to make well-informed decisions. "
Long way to go
Futures trading in Bitcoin, as well as other cryptocurrencies, still has a long way to go before it can be considered totally safe from mistakes – and even then, there are inevitable misadventures. However, as Cheung says, there are lessons to be learned as the negotiation option matures in this new and volatile space.
Bitcoin is still a new asset class, compared to others that are used in futures, and as such, traders are still in the experimental stages. It will take some time to smooth out the problems that arise in this new form of trading, but trying to mitigate losses, it should be a relatively painless process to ensure that Bitcoin futures run smoothly.