OKEx, the second-largest crypto exchange by 24-hour trading volume, has run into some trouble, as a massive failed bet on bitcoin futures has left an unknown trader unable to cover the losses and threatening to destabilize one of the crypto industry stalwarts.
The long position on the bitcoin futures contracts amounted to an eye-watering $420 million on July 31st and while the exchange asked to lower the position, the unidentified client refused to budge, leaving OKEx with no other option but to liquidate it. Subsequently, the user’s account was frozen as well. However, the exchange was not able to cover the trader’s losses as the bitcoin price slid by over 10 percent during last week.
The futures markets are essentially a battle between the sellers and buyers of the contracts, as those shorting pay the profits of investors with a “long” position and vice versa, depending on the bitcoin price. If there are not enough losses on the one side to pay for the other side’s profits, the OKEx ‘social clawback’ mechanism means that all traders that took a profitable position will now have to relinquish some of their profits to cover the loss. This is essentially an insurance policy of the exchanges to cover them against such extreme situations.
The true extent of this social loss remains a topic of debate, although it is estimated to be around 950-1200 BTC, which will be “split proportionately by all profited traders’ realized + unrealized gains”, according to the OKEx spokesperson. The actual insurance fund of the exchange only covers a measly 10 BTC loss, however the exchange has announced it has put 2500 BTC of its own capital into the fund to minimize the losses of OKEx traders.
OKEx Maintains Order in the Futures Market by Injecting 2500 BTChttps://t.co/TQUS9MoRPb
— OKEx (@OKEx) August 3, 2018
According to the official statement, “In order to prevent socialized clawbacks from occurring, we have been working really hard to optimize our risk management system. […] There have been malicious rumors accusing us of manipulating the forced liquidation system. We hereby would like to point out the fact that, most of the similar price movements in the market are caused by forced liquidation orders.“
Following the incident, OKEx stated it will be implementing an anti-manipulation policy that will be coming into effect on August 4th in a bid to prevent similar incidents from re-occurring. The recent bitcoin slump from $8200 last week to the level of $7400 at press time is widely associated with this incident in the crypto community circles.
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