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The cost of having high leverage

A significant advantage of the bitcoin futures platforms is a bigger leverage than in spot markets like Bitfinex or Kraken for example. Okex.com provides trading with up to x20 of your capital, meaning you have to put only 5% worth of each $100 contract (100%/5% = x20). If you’re not yet familiar with margin trading, check out this article for starters: Basics of margin trading bitcoin futures

High leverage, however, comes with a cost. If a lot of market participants are highly leveraged holding significantly large positions, it may be difficult to liquidate them in case their margin decreases to liquidation levels. One substantial liquidation against the order book may cause a cascade which will hammer down the market or make it soar, significantly deviating from the index price.

For this reason, okex.com liquidates positions not against the order book with a market order, but with limit orders. If the margin required to hold open positions reaches 1%, okex automatically submits limit orders to close positions at the price where leftover margin will still be 1%. This helps to avoid aggressive selling or buying in case of multiple liquidations.

However, there is a chance, of course, that those limit order will never be filled. In such case, those contracts declared bankrupt, and the loss on them will be paid from insurance fund and through a clawback.

What is okex insurance fund?

When you get liquidated at okex.com, whatever the margin is left afterwards is not returned to you, but attributed to the insurance fund (that 1% mentioned earlier). If, after settlement/delivery of contracts on each Friday, there remain some unfilled liquidation orders, the loss on them will be covered from this insurance fund.

Knowing that you will lose your leftover margin, motivates traders to be more cautious with high leverage and close their positions before liquidation. 1% might not sound like a lot, but if you’re on x20 leverage, that is 20% of your capital used to open those leveraged positions.

okex insurance fund example
Example of the history of liquidations which attributed to the insurance fund

What is the clawback?

In some rare cases, insurance fund might not be sufficient to cover losses on unfilled liquidation orders. If this happens, okex.com will automatically take needed funds from all traders who were profitable during the week before settlement. Only those who were profitable across all three contracts maturity periods (weekly, bi-weekly, quarterly) will be subjected to a clawback. For example, if you made 1 BTC profit at weekly, 1 BTC at bi-weekly, and lost 3 BTC at quarterly, your net loss is 1 BTC, so your account will not be a subject to a clawback.

Clawback example

Example: suppose that after using the entire insurance fund, there’s still 10 BTC of liquidation losses. The total profit made by traders who were profitable throughout the week is 10,000 BTC. Ten bitcoins is 0.1% of ten thousand bitcoins (10/10,000 = 0.1%), and this is your clawback rate. It means that if you made 5 BTC profit throughout the week, 0.1% of it would be taken away, which is 0.005 BTC.

Example of a clawback for 60.88 bitcoins

The clawback is the reason why you cannot withdrawal the realised profit before settlement on each Friday, that would make traders withdraw their funds just before the settlement to avoid possible clawback.

Conclusion

Having high leverage comes with a cost. Since traders can open much more significant positions then the collateral they provide, at times, there might be not enough liquidity to close a massive position. Okex.com solves this problem with the insurance fund and, if necessary, with a clawback. These two mechanisms are, basically, a socialised losses systems where unfilled liquidation losses are spread across all traders evenly.

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