The decline in Bitcoin prices earlier this month were partly due to losses incurred by OKEx cryptocurrency exchange. The Hong Kong based OKEx is one of the largest cryptocurrency exchanges in the world. A reckless trader at the exchange opened more than 4 million Bitcoin (BTC) futures that the price of Bitcoin would increase. With each futures valued at $100 each, the total BTC futures traded at $416 million. The trader offered both leverage and cash for the BTC futures. Realizing that the risk was very high, OKEx contacted the trader and asked him to reduce the risk.

BTC Futures Cause Losses

However, the trader refused to co-operate with OKex to reduce risk in BTC futures he or she had bet on. So OKex froze the account of the trader on July 31st. Bitcoin prices then declined rapidly so the exchange liquidated the account due to massive losses incurred. Other digital currency prices also declined. The trader had covered only part of the trade with cash. So the exchange made a loss of $9 million due to this futures trade. Unable to sustain the loss the exchange decided to implements its clawback policy on August 3rd, 2018. The policy is the mechanism for managing risk socially with the help of members of the exchange.

OKEx Implements Clawback Policy

Under the clawback policy, members of the exchange, who made a profit due to the losing BTC futures, pay 18% of their profit to Okex. Only profit making members share their profit with OKEx to cover losses. The exchange also announced it will cover only the difference between the settled price and the liquidated price with the profit. This event again highlighted the great risk in trading in BTC and other cryptocurrency futures. Compared to fiat currencies, more wild swings in prices of these digital currencies take place. This causes great losses or great profits for the trader.

OKEx Changes Trading Policy

Leverage was one of the reasons why OKEx suffered great losses. It allows traders to leverage their position by up to 20 times. It also did not have an effective risk management system in place to monitor rogue traders. After the incident, the exchange implemented changes to prevent similar losses in future. It announced margin ration scaling for traders who open substantially larger positions. These traders now pay a much higher down payment compared to traders investing in small amounts. This effectively reduced the losses the exchange faces in case the trader does not pay.

More mainstream organizations like the New York Stock Exchange (NYSE), Microsoft announced their plans to use Bitcoin. However the OKEx incident again highlighted problems of fluctuation in the value of Bitcoin and other digital currencies.