$460 Million Bitcoin Long Liquidated on OKEx, But Wasn’t Filled
Over the past few days, members of the OKEx community have been following the trials and tribulations of the exchange’s top contract holder. That trader accumulated a $460 million long position on BTCUSD quarterly futures before getting liquidated.
Unfortunately, that liquidation did not get filled in the market. That means there’s a $460 million overhang in the weekly settlement. By the end of the week, bitcoin futures traders on OKEx might be forced to relinquish 50% of their profits to cover the loss and the exchange’s reputation might permanently suffer.
This is some huge drama and it’s a major story in the community.
The story was well-documented by TheSwapMan on Reddit’s /r/BitcoinMarkets forum which you can see at the end of this story.
We see bitcoin futures get liquidated all the time. Essentially, it means someone has made a bet on the future price of bitcoin and lost. This is certainly a huge amount to lose – but it’s just another “whale” taking a loss.
“Great laughs, big dump rich guy gets rekt being wreckless [sic],” explains TheSwapMan.
But it’s not all fun and games for the bitcoin community:
“…the only problem is that this liquidation did not get filled in the market, and theres [sic] now a $420 million overhang in this weekly settlement period that impacts all three maturities on BTCUSD futures.”
The story was further picked up by Whalepool, who described the implications of the unfilled long liquidation:
The massive unfilled Long liquidation of $415 Million has an open loss of -950 BTC that will hurt profitable BTCUSD contract traders of all maturities on @OKEx_ Futures
— Whalepool (@whalepool) July 31, 2018
Confused? Well, in futures markets, the shorts pay the profits of longs and vice versa, depending on bitcoin price movements. If a bankrupt trader is forced out of position in a low liquidity profit, then their counterparty is essentially earning money from a corpse.
In other words, there aren’t sufficient losses on one side to pay for profits on the other side, which means traders who took a profitable position will lose money. This is a “social loss”. The futures trading community loses.
Now, this isn’t that unusual. It has happened before, and that’s why exchanges get insurance. It protects them in the event of “worst case scenario” situations like this.
Unfortunately, TheSwapMan claims the OKEx insurance fund doesn’t have nearly enough coverage for this issue. This social loss is a massive amount of money: 950 BTC.
The OKEx insurance fund, meanwhile, covers just 10 BTC.
Here’s what that means:
“As a result, if the price stays at this level, the profitable traders since last Friday until this Friday will have their gains dented by 940 BTC (950 loss minus the 10 BTC of insurance coverage), as per their socialized loss clawback system….This is catastrophic.”
You can read more about OKEx’s socialized loss clawback system here.
“This massive loss could end up causing the largest clawback in history,” explains TheSwapMan.
So what does the price of bitcoin have to do for things to be made okay in the crypto world? The market needs to recover before Friday’s settlement (16:00 Hong Kong time on August 3). If the market recovers, then the 4,160,000 contract sell wall at $8020.49 (representing the unfilled liquidation) may get filled, which would make the system whole again (with 0% clawback).
However, if the market continues to drop, then the losses on the unfilled order will continue to get worse. Eventually, we could reach a clawback rate as high as 40% to 50%.
Ultimately, this is a complicated issue that people outside of the futures trading community may not understand. However, it’s an issue that could have permanent effects on the crypto trading community – and big trouble for OKEx.
TrustNodes contacted OKEx for a statement. OKEx confirmed they’re aware of the issue and will make an announcement soon, according to OK Group’s VP of Business Development Jason Lau.
Lau also confirmed that an almost half a billion dollar liquidation order has not been filled, suggesting that the rest of the OKEx community will need to pay for it. Lau insisted the exchange has a system in place for this issue:
“If at settlement there is a deficit that that insurance fund doesn’t cover, then yes. This system has been in place since 2014 and is working as intended.”
Again, that insurance fund only has 10 BTC to cover losses. We’re dealing with a 950 BTC problem here.
“The rest will now seemingly have to be covered by everyone else under socialized losses,” explains TrustNodes. “That is, a bailout”
Here’s what it all boils down to: if bitcoin prices remain below, say $8,000, then OKEx will need to implement its socialized losses system to maintain solvency. That socialized losses clawback system will force profitable bitcoin futures traders to relinquish 50% of their profits.
Traders will be angry. OKEx’s reputation will suffer. Traders will question how a single individual was able to build such a huge position. In any case, OKEx has until Friday to solve the problem.
Here's some of the reactions on Twitter:
Hey @OKEx_ this 10 BTC insurance fund does not stand a chance against that 950 BTC loss on the #1 Liquidation! pic.twitter.com/Cx5VeioEUO
— Whalepool (@whalepool) July 31, 2018
— Rj (@RobertJandeJong) July 31, 2018
@OKEx_ You currently have a 400million dollar liquidation, half of OKEX BTC quarterly open interest, could you make a statement how you are about to handle that come Friday because that is a socialized loss of 50% if market drops from here. #bitcoin @OKCoin @BitMEXdotcom
— ibankbitcoins (@ibankbitcoins) July 31, 2018
— 🌟Marvin Chebbi🌟 (@marvinchebbi) August 1, 2018