Counterparty Risk in Bitcoin Exchanges: OKEx

Hong Kong-based Bitcoin exchange OKEx has a big problem. And this problem reminds us about exchanges. Whether decentralized or not, there is a potential risk with exchanges from the exchange itself, like when Bitfinex was hacked back in August of 2016 when 120,000 BTC were stolen. This is known as counterparty risk and we always have to ask ourselves, do we know those risks when we trade? Do we know what the exchange will do if something unexpected happens?

Bloomberg reports that a long futures position (meaning they expected the price to rise) of ~$416 million had a forced liquidation of their position on Tuesday. The trader was unable to cover the losses due to trading with leverage. OKEx is one of the largest cryptocurrency exchanges and they can affect other markets.

OKEx Forced Liquidation Policy

Since trading, and specifically futures trading with margin, mean losses sometimes OKEx has a liquidation policy for all traders. The forced liquidation occurs when the margin reaches Zero, meaning if you put up 10% and trade 10x for your trade, a 10% loss of your stake that you put up means a margin of Zero and a forced liquidation. Failure to do so during a drop in Bitcoin's price leaves this shortfall. The loss to investors is reported at $8.8 million or around 1200 BTC, per Coindesk.

What OKEx is Doing About It

Here's what OKEx has done or says they will do about it now and in the future

Increasing Margin Requirements

Of course, the first thing is an increase in margin requirements and a change in their forced liquidation policy to recognize this type of trade sooner.

Insurance Fund

The company added ~2500 Bitcoins or ~$18 million to their insurance fund for the covering of losses.

Examining Leverage

Right now, clients can trade with up to 20x leverage. Don't be surprised if this changes.

Other Traders' Profits Affected

Due to their 'socialized clawback' policy, traders with gains during this week are subject to the clawback, meaning they have to give up 18% of their unrealized trading gains to make up the 1200 BTC, per Bloomberg.

What Should You Do?

If you trade in Bitcoin on these exchanges, this is what you need to do:

  1. Only trade with risk capital, what you can afford to lose
  2. Only hold what you intend to trade actively on the exchange. Move the rest to a wallet you control
  3. Learn the policies of the exchange where you trade
  4. Minimize leverage where possible. It increases risk substantially.
  5. Leave as little capital on the exchange as possible, fiat included

Get informed, don't make yourself a victim of someone else's bad decisions where you trade your cryptocurrencies.

 

About the author

Stu Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending. Check me out on Twitter, LinkedIn and Google+

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