A huge wrong-way bet on bitcoin has left an unidentified futures trader unable to cover their losses, putting counterparties at risk and threatening to dent confidence in one of the world’s largest cryptocurrency venues.
The more than US$400-million long position in bitcoin futures was amassed on OKEx, a Hong Kong-based exchange that’s ranked number four on Coinmarketcap.com’s list of the biggest crypto platforms, according to a person familiar with the matter, who asked not to be named because he isn’t authorised to speak about the issue with the media. While OKEx has moved to liquidate the position, it has so far been unable to cover the trader’s shortfall amid a down market for bitcoin this week, the person said.
If the shortfall still exists at the 4pm settlement time in Hong Kong on Friday and exceeds the size of the exchange’s insurance fund, futures traders who have unrealised profits on OKEx may be forced to absorb the losses, in line with a “clawback” policy detailed on OKEx’s website, the person said. OKEx doesn’t expect the issue to affect the exchange’s ability to function, he said.
While clawbacks are not unprecedented at OKEx, the size of the problem wager has attracted attention in crypto circles across Asia. It underscores the risks of trading on lightly policed virtual currency venues, which often allow high levels of leverage and lack the protections investors have come to expect from regulated exchanges. 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 its ilk attracted hordes of new traders from all over the world.
“Everyone is talking about it,” said Jake Smith, a Tokyo-based adviser to Bitcoin.com, in reference to the OKEx trade. Smith said the systemic risks were likely contained, but that the episode could have some ripple effects on the market. “The main question is how will OKEx handle this,” he said.
Lennix Lai, a director at OKEx, said via e-mail that the exchange may issue a statement on Friday. Lai didn’t answer an e-mailed list of questions from Bloomberg News.
In a statement on its website last month, OKEx outlined planned changes to its margin rules and liquidation procedures that it said would “vastly minimise the size of bankruptcy positions” and make clawbacks less frequent. The exchange, which allows clients to leverage their positions by as much as 20 times, said it would start rolling out the changes in September. Before clients can begin trading futures, they’re required to pass a quiz on OKEx’s rules.
Clawbacks are unique to crypto markets and expose the exchanges who use them to reputational risks when clients are forced to absorb losses, said Tiantian Kullander, a former Morgan Stanley trader who co-founded crypto trading firm Amber AI Group. “It’s a weird mechanism,” Kullander said.
Bitcoin, the biggest cryptocurrency by market value, dropped 3.2% to $7 309 at 3.20pm Hong Kong time on Friday, extending its decline this week to 11%. It has slumped 49% this year. — Reported by Benjamin Robertson, Andrea Tan and Yuji Nakamura, with assistance from Eric Lam, (c) 2018 Bloomberg LP