A futures trader is playing a role in today’s cryptocurrency market slide, as Bitcoin (BTC) dropped 7% to around $7,000, dragging some altcoins into double-digit losses.
Hong Kong-based OKEx, the world’s second largest cryptocurrency exchange by trading volume, said it was forced to cover a trade when an anonymous futures trader, who made a wrong-way bet on Bitcoin, was unable to cover losses when Bitcoin’s price went down.
The enormous long position, worth approximately $416 million, was force-liquidated on July 31. At that time, OKEx released a statement that due to the sheer size of the order, their risk management system could trigger the “societal loss risk management mechanism.”
Under the risk management mechanism, profitable futures traders (aka counterparties) are forced to give up approximately 18% of their earnings to cover losses generated by the investor who placed the enormously bad trade.
The statement from OKEx reads,
“When the insurance fund cannot cover the total margin call losses, a full account clawback 1 occurs. In such case, only users who have a net profit across all three contracts for that week will be subject to the clawback. We will take a portion of the profit in equal percentage from all profited traders only to cover the difference between the liquidated price and settled price.”
The clawback, which dips into futures traders’ pockets, compounds perceptions of Bitcoin and cryptocurrency as being fast, loose and unstable. Investors are getting whipsawed by wild price action that is created, in part, by a lack of regulation. When a cryptocurrency exchange lets a customer leverage his position by 20x, it creates a scenario that leaves other customers stripped of protections when another investor’s huge trade goes wrong.
“Our risk management team immediately contacted the client, requesting the client several times to partially close the positions to reduce the overall market risks,” OKEx said. “However, the client refused to cooperate, which lead to our decision of freezing the client’s account to prevent further positions increasing. Shortly after this preemptive action, unfortunately, the BTC price tumbled, causing the liquidation of the account.” – OKEx
Cryptocurrency investing and trading has also been the poster child for hacks, ICO scams and market manipulation. These valid issues can be used as ammunition against Bitcoin and cryptocurrency in general. Detractors can keep saying the market is unstable and bad for consumers, and that price volatility makes Bitcoin and its cousins very bad substitutes for money.
But these issues are market functions that do not speak to the underlying technology. And these market setbacks are not stopping companies from launching crypto initiatives. Institutions such as Intercontinental Exchange, the parent company of the New York Stock Exchange, as well as mainstream news outlet Thomas Reuters and banking giant Northern Trust are developing platforms to expand options for buying, selling, spending, investigating and investing in cryptocurrencies.
These companies are analyzing the fundamentals and planning for the future. They also understand that money and the concept of money are social constructs, subject to change and technological forces.Their decisions to invest in Bitcoin-related initiatives are strong indicators that cryptocurrency appeals to a dominant segment – digital consumers who are mobile-friendly. They’re largely Millennials, not traditional consumers who are 50 and up. They use Amazon Prime and iPhones and tablets. They’re the most likely consumers to load Bitcoin onto their smartphones and use crypto to revamp the entire financial industry – in the same way that they used the MP3 to transform the music industry and adopted Netflix to change the television industry.