OKEx Activates Clawback in $416 Mil BTC Futures Trade Gone Bad

In a perfect storm of events, a large investor’s bitcoin futures trade gone bad has rocked the No. 2 cryptocurrency exchange by trading volume, OKEx. The Hong Kong-based exchange said it “force liquidated … an enormous long position,” which according to reports was worth approximately $416 million. The trader, who remains anonymous at this point, couldn’t cover losses on a long bet gone wrong and now the counterparties are being forced to do it for him.

The OKEx futures trader had an enormous long position in bitcoin, but when the exchange attempted to “liquidate the position”, as pointed out by Bloomberg, the BTC price turned lower, which created this precarious situation. That’s where OKEx’s “socialized clawback” comes into play, which basically means that futures traders who are profitable have to sacrifice approximately 18% of their earnings to cover the trade gone bad.

OKEx has an insurance fund, which is meant to be accessed in the event of a shortfall. But according to the co-admin of Whalepool.io in a blog post, that fund is comprised of only 10 BTC, which is not enough to cover the loss. That’s where the clawback clause kicks in, causing the exchange to rob Peter to pay Paul, so to speak:

“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,” OKEx said on its support page, suggesting that futures traders know what they are signing up for when they join.

The Whalepool.io trader in the blog stated that previously, OKEx, which was then known as OKCoin, dipped into its own pockets to bolster the insurance fund, but there’s no  indication of a similar response this time around.

Meanwhile, Tiantian Kullander, a founding partner at cryptocurrency trading firm Amber AI Group, characterized the clawback feature as “weird” to Bloomberg.

The situation is a stark reminder of what can go wrong in the loosely regulated cryptocurrency market, particularly for exchanges that allow margin trading. OKEx supports up to 20x leverage, which is not the riskiest formula out there.

Crypto Derivatives

Arthur Hayes, co-founder and CEO of BitMEX exchange, another crypto derivatives trading platform, recently told CNBC the exchange “offers up to 100x leverage,” adding that “most clients don’t use that much leverage and there are people who get liquidated every day. Hayes said on Aug.2 on Twitter:

The bitcoin price has fallen slightly below the $7,500 level in the last 24-hours and is currently hovering at $7,436, down fractionally, on trading volume of $4.4 billion.

Featured image courtesy of Shutterstock.

Gerelyn has been covering ICOs and the cryptocurrency market since mid-2017. She's also reported on fintech more broadly in addition to asset management, having previously specialized in institutional investing. She owns some BTC and ETH.