Bitcoin Whale’s Bad Trade Leaves Counterparties Holding the Bag

(Bloomberg) -- A massive wrong-way bet on Bitcoin left an unidentified futures trader unable to cover losses, burning counterparties and threatening to dent confidence in one of the world's largest cryptocurrency venues.

The long position in Bitcoin futures listed on OKEx, a Hong Kong-based exchange, had a notional value of about $416 million, according to an OKEx statement on Friday and data compiled by Bloomberg. OKEx moved to liquidate the position on Tuesday, but the exchange was unable to cover the trader's shortfall as Bitcoin's price slumped. 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.

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.

Read more about Bitcoin futures on regulated markets in Chicago.

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

“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 said it injected 2,500 Bitcoins -- worth about $18 million at current prices -- into an insurance fund to help minimize the impact on clients.

OKEx, which requires traders to pass a quiz on its rules before they can begin investing in futures, also 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. The exchange, ranked No. 2 by traded value among fee-charging venues tracked by Coinmarketcap.com, allows clients to leverage their positions by as much as 20 times.

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.

Bitcoin, the biggest cryptocurrency by market value, dropped 2.2 percent to $7,383.44 at 4:56 p.m. Hong Kong time on Friday, extending its decline this week to 10 percent. It has slumped 48 percent this year.

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--With assistance from Eric Lam.

To contact the reporters on this story: Benjamin Robertson in Hong Kong at brobertson29@bloomberg.net;Andrea Tan in Singapore at atan17@bloomberg.net;Yuji Nakamura in Tokyo at ynakamura56@bloomberg.net

To contact the editors responsible for this story: Sam Mamudi at smamudi@bloomberg.net, ;Marcus Wright at mwright115@bloomberg.net, Michael Patterson

©2018 Bloomberg L.P.