
Bitcoin Whale's Bad Trade Leaves Counterparties Holding the Bag - chollida1
https://www.bloomberg.com/news/articles/2018-08-03/a-massive-losing-bet-on-bitcoin-futures-has-investors-buzzing
======
cm2187
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...

~~~
weavie
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?

~~~
mkirklions
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.

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

~~~
blake1
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.

------
ArtWomb
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/](https://marketprotocol.io/)

------
officialchicken
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.

~~~
zby
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.

~~~
officialchicken
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?

~~~
zby
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.

------
Animats
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...](https://www.bloomberg.com/news/articles/2018-08-03/a-massive-
losing-bet-on-bitcoin-futures-has-investors-buzzing)

------
hristov
"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.

~~~
ska

       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.

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

------
mannykannot
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...](https://www.fi-desk.com/margin-calls-for-bitcoin-futures-pose-
systemic-threat/)

~~~
slivym
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](https://support.okex.com/hc/en-
us/articles/360011941512)

~~~
SilasX
>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.

------
ve55
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.

------
ForHackernews
Be your own bank! (tm)

~~~
wyldfire
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.

~~~
curiousgal
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.

------
mkirklions
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.

~~~
hristov
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.

~~~
PhantomGremlin
_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](https://en.wikipedia.org/wiki/Futures_contract)

