A spectre is haunting crypto markets — the spectre of futures trading greed
“OK Google. Define ‘Kahuna’ please” — Masters. Keepers of the way, the facilitators of harmony. Teachers of alignment with divine blue print; the way showers. Seems crypto twitter is loaded with salty bag holders looking for a way to replenish their ‘fomo-matic’ sins. When kahuna?
Today is a particularly complicated Friday. All weekends are difficult, as crypto markets work 24/7 while investors wrestle between unplugging from their screens or trying to capitalise on the weekend’s above-average price swings. These occur as the size of individual orders is larger than usual, having an outsized impact on overall lower volume.
Shortly before 9am BST, one exchange’s decision will likely influence price action for the coming days. OKEX, founded in 2014 by the Chinese exchange OKCoin is the world’s second largest crypto exchange by volume, and is particularly famous for its bitcoin futures market and its “abnormal” situations.
Futures allow traders to exchange contracts for the purchase or sale of an asset at a future date. Such contracts are usually highly leveraged — i.e. one can control a larger amount of bitcoin with a lower amount of capital — and are famous for having a strong influence on the spot price, especially around the contracts’ settlement dates, as explained in this thread by Aurelius, a popular CryptoTwitter analyst.
Why 9am BST then? OKEX’s weekly contract settles by then; and, this Tuesday, when price declined 5% from £6.2k ($8.1k) to £5.9k ($7.7k), a reckless trader who was long on over £350 ($460) million worth of bitcoinlost their bet in what was OKEX’s largest liquidation ever. Remember this trader was leveraged, meaning they didn’t put all those millions in, however, their position still needs to be covered by the market.
This liquidation wasn’t filled at the time as it was so big it would surely crash prices across the board. OKEX has an insurance fund to cover such situations, but it’s current size is only of 10 BTC. So, it socialises its losses among all its futures traders, who might have to give up 50% of the profits gained this week to ensure OKEX doesn’t go bankrupt. The lower bitcoin’s price goes, the worse this situation will be.
A statement by OKEX on how it will handle this problem is expected soon, so keep your eyes on its Twitter account and the charts. Remember to move slowly, as this instability has already been reflected on yesterday’s market performance. Many are expecting bitcoin to make a decisive move once this uncertainty clears, but both “moon and doom” are possible scenarios. Some say we may be approaching critical £5.5k ($7.2k) support!
[Update: OKEX just published an announcement on their Twitter account indicating they will increase the size of its insurance fund by 2500 BTC to reduce the socialisation of losses and “maintain order in the futures market”]
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▪ Unchained podcast’s latest episode was one of the best. Learn why Meltem Demirors and Jill Carlson are sceptical of the platitudes that haunt cryptoasset narratives.
▪ Phil Bonello’s ‘Valuing Productive Cryptoassets’ suggests we should be valuing most tokens like “real estate, equity, and bonds”, i.e. with a simple net present value calculation.
▪ Cuy Sheffield works at Visa and just wrote a post for TokenEconomy’s blog. It argues ether can appreciate if governments decide to adopt Ethereum as public infrastructure.
In leveraged markets, a liquidation is any trade that offsets a long or short position. However, it usually refers to an automatic liquidation that covers a bet’s losses.