A liquidation of a long position on the OKEx Bitcoin futures market has caused severe losses to the OKEx insurance fund, resulting in some BTC 1,200 of losses being paid for by traders in short positions.
The move, known as a “clawback”, happened when a trader entered into a USD 417 million long position, roughly BTC 52,000, on the OKEx Bitcoin futures market on 31 July 2018. A long position is when a trader bets that the Bitcoin market will rise, and they can use leverage to multiply their bet. However, if Bitcoin’s price drops, a long position can rapidly lose money and if it loses too much money, it is liquidated to prevent further losses.
The USD 417 million long position was liquidated, causing so much losses that the OKEx insurance fund could not handle it even with a BTC 2,500 Bitcoin injection. This triggered the clawback.
The unusually large size of the long position raised eyebrows at the OKEx risk management team and they requested multiple times that the trader close some of their position to lessen the risk. The trader did not listen and perhaps indicated they would increase the long position, so OKEx froze the account. Right after OKEx froze this account, Bitcoin price dropped so much that the account was forced into liquidation. The liquidation of this single large long position on OKEx is believed to have dropped the global Bitcoin market from USD 8,000 to USD 7,300.
OKEx used BTC 2,500 of their own money to increase the insurance fund for this incident, but the entire insurance fund has been wiped out, and a clawback for 1,200 Bitcoins has been initiated. Traders who profited from short positions are the ones who will have to make up for this loss, which comes out to 50% of their profits.
OKEx has reserved the right to check for price manipulation during the settlement of these contracts, and to adjust the price of Bitcoin to its liking if it is found that manipulation has occurred. OKEx says this price adjustment will reduce the clawback. In reality, if it adjusts the price upwards on the settlement to lessen the clawback, it will decrease profits from short positions. Essentially, traders who have had to pay for the loss will lose the same amount.
New rules are being implemented on OKEx on 4 August 2018 to prevent such large positions in the future, to reduce the possibility of catastrophic losses and clawbacks.
This incident is a good example of how Bitcoin derivatives contracts don’t necessarily have any money backing them, making derivatives trading quite risky for the exchange and individuals. Additionally, this incident shows how derivatives trading can be damaging to global Bitcoin price.
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