• 3 days Big Business’ New COVID Initiative: No Jab, No Job
  • 5 days The Most Interesting Stocks Of Earnings Season, For Better or Worse
  • 7 days Chinese Stocks Rebound After Regulatory Scare
  • 9 days Apple Stocks Falls After Blowout Earnings Report
  • 9 days The 5 Biggest IPO Disasters Of 2021
  • 10 days Crypto-Based ‘Shadow Financial Market’ Spooks Regulators
  • 13 days Ireland Balks At Biden’s Global Tax Plan
  • 16 days Robinhood To Trade On Nasdaq Targeting $32B Valuation
  • 19 days Facial Recognition Is Watching You
  • 21 days Biden’s $3.5T ‘Human Infrastructure’ Workaround
  • 21 days The Fed’s $3 Trillion Headache
  • 24 days Why Bitcoin Could Struggle To Recover After Epic Crash
  • 24 days Wells Fargo Back In The Spotlight Over Personal Loan Cancellations
  • 25 days Delta Variant Real Threat To Economic Recovery
  • 28 days JEDI Drama Continues With Microsoft Contract Cut
  • 30 days DiDi Shares Take a Beating From Chinese Regulators
  • 31 days Thousands Of Companies Hit In Latest Ransomware Attack
  • 31 days Jobs Report Has Big Numbers, But Still Big Problems
  • 32 days Robinhood’s ‘Mission’ Questioned in $70M Fine
  • 35 days Didi Just Went Public, And Uber Is Loving It
Crypto-Based ‘Shadow Financial Market’ Spooks Regulators

Crypto-Based ‘Shadow Financial Market’ Spooks Regulators

Bitcoin crashed spectacularly in May,…

Coinbase IPO Explodes, But Fails To Keep Its Momentum

Coinbase IPO Explodes, But Fails To Keep Its Momentum

Giant cryptocurrency exchange, Coinbase Global…

  1. Home
  2. Cryptocurrencies
  3. Bitcoin

Is This Why Bitcoin Prices Dropped?

BTC

We may have found the reason for Bitcoin's persistent weakness over the past week.

After hitting a price above $8,000 thanks to recent Blackrock ETF speculation, the cryptocurrency has fell 10 percent in the past week, dropping as low as $7,300 today, leaving traders stumped what was causing this latest selloff in the absence of market-moving news.

It turns out the reason may have been a good, old-fashioned margin call forced liquidation, because as Bloomberg reports a massive wrong-way bet left an unidentified bitcoin futures trader unable to cover losses, resulting in a margin call that has "bailed-in" counterparties forced to chip in and cover the shortfall, while threatening to crush confidence in yet another major cryptocurrency venues.

According to a statement posted by Hong Kong's OKEx crypto exchange on Friday, a long position in Bitcoin futures that crossed on Monday, July 30, had a notional value of about $416 million. After Bitcoin prices dropped sharply in subsequent days, OKEx moved to liquidate the position on Tuesday, "but the exchange was unable to cover the trader’s shortfall as Bitcoin’s price slumped."

The exchange, which identified the problem trader only by an anonymous ID number 2051247, said the position was initiated at 2 a.m. Hong Kong time on July 31.

(Click to enlarge)

“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.”

The exchange was forced to inject 2,500 Bitcoins, roughly $18 million at current prices, into an insurance fund to help minimize the impact on clients. And since OKEx has a “socialized clawback” policy for such instances, it also forced other futures traders with unrealized gains this week to give up about 18 percent of their profits. Related: Poll: 70% Of Investors Have No Interest In Bitcoin

As Bloomberg notes, "while clawbacks are not unprecedented at OKEx, the size of this week’s debacle has attracted lots of attention in crypto circles."

The episode underscores the risks of trading on lightly regulated virtual currency venues, which often allow high levels of leverage and lack the protections investors have come to expect from traditional stock and bond markets. Crypto platforms have been dogged by everything from outages to hacks to 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.

And while everyone also wants to now how much capital was actually at risk, the biggest question is just how much margin there was in the trade. The problem here is that the exchange - ranked No. 2 by traded value - allows clients to leverage their positions by as much as 20 times.

For those who rhetorcially tend to ask "what can possibly go wrong" after every bitcoin slump, well now you know.

What happens next?

Related: Mexico’s Fintech Industry Is Booming

OKEx, which requires traders to pass a quiz on its rules before they can begin investing in futures, outlined planned changes to its margin system and liquidation procedures that it said would “vastly minimize the size of forced liquidation positions” and make clawbacks less frequent.

According to Bloomberg, 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.

Finally, judging by the bounce in bitcoin, the market appears relieved that it has identified the culprit of the selling, and with no more liquidation overhang left, is once again pushing prices across the crypto space higher.

By Zerohedge

More Top Reads From Safehaven.com

Back to homepage

Leave a comment

Leave a comment