Bitcoin Whale's Bad Trade Leaves Counterparties Holding the Bag | Hacker News Reader

Bitcoin Whale's Bad Trade Leaves Counterparties Holding the Bag

bloomberg.com

85 pointschollida142 comments

So basically someone buying bitcoin futures on margin got burned and so are the other users of the exchange who allowed that.

I can't help thinking of that scene in Zoolander with a bunch of idiots playing at splashing each others with gasoline before lighting up a cigarette...

I guess the price slumped faster than the exchange could liquidate his position. It makes you wonder what an exchange was thinking letting someone build up a $0.5 billion position on margin.. Surely that's just very poor risk management on behalf of the exchange?

Pretty much. The liquidation "insurance" fund was only 10 btc. On BitMEX (the other big high leverage bucket shop) it's 10k btc.

My favorite part of the story is that they reached out to the trader and asked him to reduce his position and he was just like "nuh uh . . . dies".

"If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem."

shrug You don't have to care what your user's margin positions are if you don't have any intention of paying out on them if they're large enough, or you can manipulate the local orderbook to stop them out.

I cannot imagine letting such insanity happen.

You allow shorts on your exchange, but you dont have controls in-place?

My gosh, have some php email() when >1M in shorts is happening. Send it to a CEOs personal email, or something... (let alone have functions in place to force a realization)

I really am having a hard time understanding how this happened.

A bunch of people thought they were smarter than every bank and stock exchange out there. That's how this happened.

How could an exchange allow long futures without allowing short futures?

They do require them to math. So this trader’s losses were other traders’ gains. However, when the mark-to-market losses exceeded the loser’s ability to pay up, then they had to close the position and the exchange had to pay up. Looks like they didn’t actually have the assets to do this last part though, which is the only really bad part of all of this. Traders blow up all the time, but you have no business calling yourself a futures exchange if you make other traders absorb those losses. The typical model for a real exchange is for th exchange itself to maintain capital reserves sufficient to make traders whole in these circumstances. OKEx doesn’t really have any business purporting to be an exchange (and couldn’t, legally, under US law I believe) if it isn’t maintaining these capital reserves. Doesn’t seem unusual for this space though.

There is a theory that this was a hedge of a position on another exchange, knowing their losses would be socialized if they bet wrong.

Hilarious. So it seems people who understand the details of all this are just arbing exchange rulesets. Beautiful.

It's not really as bad as that. Futures exchange allow traders to bet if stuff will go up or down with traders on one side betting on up and on the other side on down. The exchange itself doesn't take a position. If the moves are too big sometimes the loser can't pay all their losses and in that case the winners don't get all their profits. It's business, or gambling if you prefer, working in the way it was kind of planned.

I'm short bitcoin futures myself on bitmex at the moment and it's all in the T&Cs that it works that way. In fact on bitmex your liabilities are limited to your deposit which seems a sensible way to do things. I'd rather risk not getting all my winnings when things go my way than risk them coming after my house if they go the other.

I still recall the Refco scandals from last decade. And on the face of it this actually seems like relatively good governance on the part of OKEx. They forced liquidation when it got out of control. Injected the company's own capital into an insurance fund. And triggered the contractual clawback only on the profitable put trades. Key takeaway is that the exchange itself never went under or engaged in fraud. Which at the end of the day is the desired outcome for all contract holders and exchange members. If the BTC price had gone up, it may never have been an issue.

The only fault is allowing the position in the first place without adequate margin. Market Protocol is claiming on twitter they've solved the solvency problem using smart contracts:

https://marketprotocol.io/

I find it interesting this exchange literally privatizes gains while socializing losses (some percentage of all futures contracts this week will be penalized to cover the whale-fail according to the article). Without their injection of 2,500 BTC "insurance" they would probably go out of business.

No - it is the gains that are taxed to pay for the losses. Traders who won will have slightly smaller rewards. This is actually better solution than the traditional way of forcing the losers to cover the whole loss. When you make a position there you make slightly different bet then on traditional exchanges - but the system is more stable this way.

No - the traders do not get a bonus or discount when the exchange profits, only the potential to be penalized. And the exchange is privately owned. Whether or not that is a better solution than well-regulated markets is a symptom. And arguably less stable - who will open an account with them now unless they offer even more leverage and re-create these same conditions?

The traders get a discount when they lose and the margin call does not cover their loss. They can just walk away - while traditionally they would have to cover it all.

No they wouldn't have gone out of business.

Futures is a zero-sum game, for every dollar lost there is another one won. In the worst case, they would have taken all the profits from the other traders and used them to offset this losing trader.

I'm stupid when it comes to this stuff.

But how would that work if the traders making the profits withdrew their profits? You can't claw it back after the money leaves your accounts... right?

You are right.

Which is why they don't allow you to withdraw the profits until all contracts are settled:

> When a close-order is executed and filled, the corresponding futures position is then closed. The unrealized profits and losses will therefore, become realized. It can be used as margin of the contract, but cannot be withdrawn until the contracts are settled.

So who's the "whale"? The lender has to know. Nobody lends US$400M to an anonymous party.

OKEx's margin terms say "4.7 If the borrower is unable to repay the interest with the asset in the margin account, the borrower has the liability to repay the debt with all the asset available on OKEx. However, if all the borrower's asset is still insufficient, the lender shall share the responsibility."[1] Where in their trading rules do they get to dump that liability on the other party?

OKEx, although supposedly in Hong Kong, claims to be located in Malta for legal purposes but wants arbitration in Beijing. If they were subject to Hong Kong courts this would probably be resolved with less trouble. Many deals are made in Hong Kong because the parties have access to a working civil court system.

[1] https://www.bloomberg.com/news/articles/2018-08-03/a-massive...

"Because OKEx has a “socialized clawback” policy for such instances, it will force futures traders with unrealized gains this week to give up about 18 percent of their profits."

"Clawbacks are unique to crypto markets"

"Socialized clawback"??? So they take your money to make up for someone else's losses? Wow. Why would anybody put a cent into such an exchange? Do all bitcoin exchanges have this policy?

I think the main benefit of bitcoin in history might be to teach an entire generation about the importance of proper financial regulation. This is a generation of men that have been fed from young age a bunch of bullshit about deregulation and libertarianism. They are being taught a very expensive but important lesson right now.

   I think the main benefit of bitcoin in history might be to teach an entire generation about the importance of proper financial regulation.

There has to be a less expensive way to recapitulate the history of market regulation.

This seems to be a lesson we have to learn over and over. Each time more expensive than the last.

Is this essentially a margin call situation, or is there more to it? While searching "bitcoin futures margin call", I found this article from December, which seems to be predicting this sort of thing.

https://www.fi-desk.com/margin-calls-for-bitcoin-futures-pos...

It doesn't seem quite like a margin call. The exchange explains here[1]. What appears to have happened is that a client bought a tonne of futures with huge leverage. The exchange noticed and asked the client to reduce the position- because it violated their risk limits. (In a proper exchange, a client wouldn't have been able to get in that position). The value dropped and the client didn't want to sell - so eventually the exchange decided to force the sale in order to resolve this. Naturally, they did this while the futures were underwater, and because of the huge leverage they took a loss (which technically they should try and get back from the client - but most likely the client can't cover the loss).

Fortunately, being an exchange for crypto they're unregulated, so they can do what they like. They basically have a policy where they can take money from people to cover the cost they incurred liquidating this position.

So it's worth remembering that on this exchange any volatility will lose you money. Big move for you? You'll make a load of money, but others will lose and the exchange will come and take your profit toe pay for the losses on margin. Big move against you? You lose all your money.

[1]: https://support.okex.com/hc/en-us/articles/360011941512

>Fortunately, being an exchange for crypto they're unregulated, so they can do what they like. They basically have a policy where they can take money from people to cover the cost they incurred liquidating this position.

Correct me if I'm wrong, but isn't that exactly how it would work on an above-board, regulated exchange too? Their first, second, and third priority is making sure you can pay back your margin/short; they don't care, and aren't required to care, that they could get a better price if they just held out "till Thursday".

The only way a regulated exchange might be different is that they would be required to price (and credit) the assets in the forced sale from a representative sample across multiple exchanges, in order to avoid shenanigans from very local flash crashes that don't represent the best market price.

Their version of events seems like ass covering - for a loss on a principle level for OKeX the PnL from the clients position would have exceeded the clients total margin posted not just that clients posted maintenance margin - which it appears they are claiming. OKeX's risk team given the liquidity situation must not have either been able to 1) raise more margin via a margin call AND 2) been unable to unwind the position prior to margin exhaustion given liquidity constraints.

I find it truly shocking they did not have net and gross delta limits defined for client accounts and did not model or monitor margin / liquidity dynamics. It is simply amateur hour at play.

The client essentially had a massive free put option against the OKeX and its members. I would not be at all surprised if the client was actually the other way on another exchange (net flat) and simply arbed OKeX's socialised policy.

This trader likely bought their contracts with very high leverage, probably 20x, meaning that they had $20.8 million USD of BTC as collateral for a trade with a notational value of 20 times that (416 million). Other platforms with better engineering have software-defined risk limits to prevent people from opening up positions that are too large on high leverage.

Be your own bank! (tm)

The fact that cryptocoin exchanges decide to offer leveraged trading options that mirror other popular financial instruments doesn't change bitcoin's core values.

This just underscores the fact that the cryptocoin economy contains many agents that don't have the ideology that quite lines up with the early proponents. IMO, that's not necessarily a bad thing.

At one point some exchanges were offering 500x leverage! It just adds instability to the market which is a bad thing if you are pursuing those core values.

On the contrary, I think "an unregulated market where none of the participants trust each other" is a good summary of the ideology of bitcoin's early proponents.

> The fact that cryptocoin exchanges decide to offer leveraged trading options that mirror other popular financial instruments doesn't change bitcoin's core values.

It's indicative of a change, and it can be reasonably argued that Bitcoin's original core values have already changed signficantly.

He is trolling.

I think in this case the correct burn on the cryptocurrency-libertarian ideology is "but a rational actor would never do that"

All actors seem to behaving rationally to me. Just because some people dont like the outcome doesn’t mean anyone acted irrationally at any point.

I think the Bitcoin ecosystem reacted exactly as it should as all actors involved in the fiasco got exactly what they deserved.

An Exchange allows shorting Bitcoin but doesnt have the right precautions in place...

All the people I dont like got screwed in this case.

I want to use Bitcoin as a long hedge against hyperinflation. I dont understand day traders who gamble on crypto.

This wasn't a short. It was a long position that got burned. The article doesn't even mention if the exchange allows shorts. But good try.

The article doesn't even mention if the exchange allows shorts.

It's a "futures" exchange. Every transaction is basically one party being long vs the other party being short. The parties are agreeing to buy/sell something from each other at some point in the future.

For example, an oil driller wants to assured of receiving a certain price when selling 1000 barrels of crude oil 3 months in the future (they haven't pumped the oil out of the ground yet). An oil refiner wants to lock in a guaranteed price for 1000 barrels of oil they will buy 3 months from now.

This particular exchange isn't for oil or corn or cotton or soybean futures. It's for Bitcoin futures.

There are currently very sound business reasons for futures contracts on commodities. But not, IMO, for Bitcoin futures. Which makes this whole enterprise nothing more or less than simple speculation.

https://en.wikipedia.org/wiki/Futures_contract

Yup, wholeheartedly agree with you. A case of natural justice if you ask me.

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