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Blockchain Cryptocurrency Research BTC Bitcoin Slumps OKEX Forced Liquidation

BTC Slumps Following OKEx Forced-Liquidation Incident

07/30 – 08/05

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WEEKLY RECAP

  • Total market cap. reached $253.80 bn (a 14.7% decrease), where 7 day trading volume slumped 16.6% for top 100 crypto


WEEK AHEAD

  • 9 Aug: XLM to list on Bitpanda exchange
  • 13 Aug: Revaloot to release airdrop to BTC holders


THOUGHTS OF THE WEEK

Investors turned their attention towards the Bitcoin (BTC) futures market following the slumping price of BTC this week. As first reported by Chinese financial news media Jinse on 31 July, a client of OKEx initiated an “unusually large” long position of approximately 4.16 mn BTCUSD quarterly futures, and this account was frozen by OKEx after the client refused to lower this long position. The BTC price tumbled shortly after this preemptive action, and OKEx had to liquidate the client’s position.

As noted in our Chart of the Week, the BTC price once reached $6930 since the reveal of this incident. In the case of BTC futures liquidation, OKEx utilizes its socialized clawback mechanism in cases when the balance of its insurance fund is insufficient to cover the total margin call loss.

The socialized clawback mechanism raised huge concern among participants on OKEx, as the balance of the insurance fund (10 BTC) could not cover the estimated total loss of 1200 BTC at the time of this incident. Since the outstanding losses need to be covered by the counterparty,  OKEx traders which had shorted BTCUSD quarterly futures risked having up to 18% of unrealized gains “clawed back” by OKEx to cover the losses. Failure to take remedial measures before the scheduled settlement time (HKT 4pm on 3 Aug.) could have resulted in serious damage to OKEx’s reputation.

Realizing the potential consequences brought by this forced liquidation incident, OKEx performed the clawback of $9 mn, injected 2500 BTC from its own capital pool to its insurance fund to settle this exposure, and further promised to implement a series of risk management measures. We believe that a tiered margin system would be the most effective, since users with larger positions would be required to place higher margins leading to lower effective leverage, limiting the magnitude of losses and minimizing the occurrence of socialized clawback.

The growing demand for BTC futures investment is worth noticing despite the slumping crypto market since April. As noted in the quarterly statistics produced by the CME Group, the average daily volume of BTC futures in Q2 2018 surged 93%, where the rate of open interest surged 58%. We believe the trading volume of BTC futures will possibly soar further given the increasing volatility of BTC prices and the growing interest in BTC investment from the traditional financial sector.


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