Bitfinex will roll out x100 margin trading for Bitcoin. In the whitepaper on Leo, Bitfinex’s own crypto currency, under the heading “Upcoming projects” there was already a hint that from June 2019 trading would be supported with a leverage of up to 1:100 for “selected customers”. Now Bitfinex’s CTO Paolo Ardoino has added to Twitter, the offer is obviously ready for launch.
So far, Bitfinex has limited itself to levers of up to 1:3.3. To the estimate: Who trades for instance Bitcoin (BTC) with lever 1:100, must shoot already with price movement of 1 per cent in the unexpected direction immediately capital or loses its employment.
In the world of cryptocurrencies and especially to Bitcoin there are many interesting facts, statistics and numbers. This is due to the fact that it is a public ledger in which all relevant data about transactions, mined coins and wallets are publicly available.
In this article we take a look at a selection of these numbers and provide you with helpful information. We have categorized them to give you a better overview:
In the last two episodes we learned that some exchanges tend to socialize losses from big liquidations. The traders on the exchange have to take a haircut, the loss is carried by many shoulders and the exchange can keep on operating. That works, but it is not fair. Users that have not caused the loss have to take it. It reminds of the bailout 2008. The taxpayer had to bail out the system-relevant banks that were “to big to fail”. With hundreds of billions of dollars.
The BitMEX Insurance Fund
There are exchanges that prepare for these big liquidations. They create an insurance fund. Should highly leveraged trades, which bust all orderbooks, be liquidated, the insurance fund will be triggered. That prevents big liquidations from endangering the whole system.
But if the insurance fund becomes to big, it becomes system-relevant itself. Should the exchange be closed or hacked and the insurance fund hits the market, it would be a crash of epic proportions. The BitMEX insurance fund is such a case. By now it holds about 0,15% of all Bitcoins – worth about 232 million dollars.
The fund would be ranked 33 on the bitcoin rich list (#1 is Satoshi Nakamote, the founder of Bitcoin with about 900k Bitcoins, #2 is the FBI with about 150k Bitcoins in their wallets). A concentration like this is always system-relevant.
The BitMEX Trading Desk
But the sheer size of the fund is not the only problem. BitMEX runs a trading desk itself – trading against its own customers. And of course they have an informational advantage, because since they run the exchange they see every order and know the exact point of liquidation for every order.
They know exactly how much capital they need, to drive the price into this cluster of liquidations. If the bid/ask-spread is smaller than the maintenance margin of a leveraged position, then the money from the liquidation will be added to the insurance fund. So BitMEX has a motive to liquidate its customers. But that’s not all.
Order Submission Errors
Everybody trading on BitMEX knows the dreaded Order Submission Errors. If price becomes volatile, the engine closes down and no more orders can be placed. BitMEX is a multi-billion-dollar-company and one should assume, that they should be able to build an engine that also works on high payload.
And that’s why some critics say that these Order Submission Errors are no bug, but a feature. Because the BitMEX trading desk (and maybe some premium customers) get a time advantage, where they can place their orders without rush, while everybody else is shut out. Conclusion The fact that BitMEX trades against its own customers is not only dubious but highly unethical. And a system-relevant insurance fund coupled with a team with questionable ethical standards is a threat for the market.
When it comes to institutional investors there are still a lot of hurdles for some of them. E.g. the data feeds, something like the Bloomberg terminal in addition with cryptocurrency data. Since Bloomberg does use some data, like the TOP10 of Huobis price index, but not much more, it is a serious weakness of their service bandwith. Now a competitor (Refinitiv) plans to tackle this weakness of Bloomberg to get an edge in a very important and stark growing market of the future: Institutional Bitcoin investors.
Refinitiv is a company owned by the Blackstone Group LP (55%) and Thomson Reuters (45%). They made $6.1B revenue in 2017 and have 18,500 employees. Their “Eikon Terminal” is a direct competitor to the Bloomberg terminal through a new collaboration with the infamous BitMEX exchange.
Bitcoin leveraged trading is risky. Very risky. But what happens when there is an exchange enabling their customers to trade Bitcoin with x500? Well, BTX500 “tested” this and the results where pretty clear:
As loomdart reported on Twitter the price there went from $8800 to $85,000 to $6 within a matter of minutes. BTX500 claims to be regulated and licensed in Australia and that funds held are fully ensured by Lloyd’s of London.
Even this is correct, to offer a x500 on Bitcoin is just plain crazy. We can just recommend to stay away from this exchange and all others that could be set up in the future offering leverages like this. It is mainly a trap for uneducated traders who are not aware of the risks like the following screenshot shows:
A big story this week was the suicide of a Chinese Bitcoin trader who traded on x100 leverage and is assumed to lost 2,000 BTC through his trading according to 8btc. They reported that the trader, Hui Yi, lost this amount after going short. He was co-founder and CEO of the analysis platform BTE.TOP and died on the 5th June.
Measured in current prices this were around 16M$, leveraged by 100 times this is an insane magnified loss. At this leverage he was basically trading 200k Bitcoins, means +1% (while he was short) was enough to get him liquidated.
Exposed was his death by an ex-partner and there are speculations that Yi was not trading with his own money, but money from his company clients. There are also speculations about a faked death which we do not want to comment in any way. At this point our condolences to all relatives and people who were close to Hui Yi.
This story shows how important it is to know the risk when trading Bitcoin on leverage. To trade x100 is kind of irresponsible, even you are a professional trader.
The main problem with somebody who begins to trade in any asset-class is that there is no experience beforehand. No one is born the perfect trader; every successful one made a lot of mistakes and most of these mistakes are probably based on irrational actions caused by emotions.
This is a problem. Especially when you trade cryptocurrency markets like Bitcoin. Cryptocurrencies are, in perspective, a very new technology. Not only in general but in a technical way, it is different to anything available now, yet we still are seeing low adaptation and practical usage of the blockchain-technology. This paired with the fact that the market runs 24/7 means the emotional reactions of market participants are stronger than anywhere else.