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Category Archive : Exchanges

CFTC Investigates BitMEX

Bitcoin exchanges have difficult times in the USA. In a lot of cases, strict regulatory requirements ensure that crypto and blockchain companies censor themselves from making their platforms accessible to Americans. This is also the case with BitMEX – at least that’s what people thought – up to now.

Bloomberg Report About CFTC Investigation

The Bloomberg magazine reported that the CFTC has been investigating the crypto options exchange for some time now. The investigations focus on suspected cases according to which BitMEX did not consistently enforced the exclusion of users from the USA. The CFTC accuses the trading platform of inadequate KYC measures.

This goes against statements by Joe Coufal, responsible for PR at BitMEX, according to which “BitMEX has proactively banned all US customers since 2015”.

BitMEX particularly popular in Asia

BitMEX is registered in the Seychelles. However, the platform is available almost all over the world – with the exception of the USA, North Korea, Iran, Syria and Sudan. Especially in Asia, the options exchange enjoys some popularity. On BitMEX, futures traders can leverage Bitcoin profits (and losses) one hundred times.

Most recently, BitMEX has been criticised for favouring insider trading. During a debate with BitMEX CEO Arthur Hayes, Bitcoin boss Nouriel Roubini, also known as “Dr.Doom”, accused the stock exchange of acting against its customers. A video of this debate was initially kept under lock and key, which prompted Roubini to fire again against Hayes and his company, but has since emerged (in edited form).

Already in August 2018 there was a DDoS attack on the futures trading platform. But instead of issuing warnings to the users, there was talk of maintenance work. Many traders were unable to liquidate their positions and posted losses.

The future will show what consequences the CFTC investigations will have for BitMEX. But what we can already see is that the order books are getting thin as some market makers left the platform:

The Art of Liquidation: Part IV – The Invisible Tentacle of the Markets

Welcome to “The Art of Liquidation: Part IV”. In the last few episodes we learned how various crypto derivative exchanges handle extremely large liquidations, which are potential threats to the market. OKEx and Poloniex socialize the losses, Bitmex has an insurance fund that has become systemically relevant itself due to its sheer size. What is Kraken’s approach?

Maintenance Margin on Kraken

Let’s look at the liquidation model of the exchange “Kraken”. Unlike the exchanges previously examined, Kraken does not have a P2P margin model. It is not other users who borrow the funds but Kraken itself. If the maintenance margin falls below 40% the position will be liquidated automatically. At 80% there is a margin call and Kraken reserves the right to liquidate below 80% in extreme market situations.

Such extreme situations would be, for example, massive volatility, which is not uncommon on the crypto market. Since Kraken provides the funds itself and has to carry the losses, it is understandable that they operate a tight maintenance margin system. Otherwise large liquidations would be endangering Kraken itself.

The Instant Margining System

The risk for leveraged futures on the platform is managed via the so-called “Forced Liquidation” process in the “Instant Margining System“. If an extremely large position is liquidated, which bursts the Oder books, it is called “Unfilled Liquidation” and triggers the following: The Unfilled Liquidation is transferred to a “Liquidity Provider”. This is a market maker who has unlimited liquidity and can therefore handle liquidations of any size.

This is an emergency mechanism that only triggers after the order books have been emptied. According to Kraken, this happens on average every 10,000 hours, i.e. less than once a year (about every 420 days).


So we see Kraken is not organized like other platforms in a P2P manner. It provides leverage and handles large liquidations with extremely liquid market makers.

It makes sense that Kraken itself would set a limit on positions that would exceed even this extreme liquidity, but that would probably be extremely high sums (probably at least eight or nine digits). One could categorize the Kraken model as centralized liquidation, unlike the other exchanges.

Bitfinex Will Roll Out x100 Margin Trading

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.

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The Art of Liquidation: Part III – The BitMEX Insurance Fund

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.

BTX500: Bitcoin from $8800 to $85,000 to $6 With Enabled x500 Leverage

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:

The Art of Liquidation: Part II – The Polo-$CLAM-Chowder

If an asset is very illiquid this can lead to great volatility. The order books are thin and medium or even small market orders move the market. Everybody who tried to accumulate microcaps before knows how difficult it is to build or dump a position that is bigger than the orderbooks. With microcaps already small buys or sells can lead to massive slippage. Shitcoin Margin Trading wih illiquid “shitcoins” is a recipe for deseaster.

Poloniex offers a peer-to-peer-system for margin-lending on its exchange. And it offers trading on margin for extremely illiquid tokens. This opens a possibility for whales to accumulate a bigger position of this shitcoin, short it with high leverage and then start dumping the coin to crash the price. Flash Crash and Haircut On the 26th of may the was an incident on Poloniex.

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