OKEx, one of the most popular cryptocurrency exchanges in the world, has angered some of its customers by cancelling their investments early, at a point in time when they were in the red. This has caused them to lose money.
The investments were Bitcoin Cash futures, with a total value of $135 million. The exchange made the move to avoid the disruption caused by Bitcoin Cash splitting into two different coins last week.
What are Bitcoin Cash futures?
A futures contract is a financial derivative. When an investor signs a futures contract, he promises to purchase a commodity at a certain price at a certain time in the future. The goods may not ever actually be purchased; the contract acts as a way of betting on the future price of the commodity.
In the case of Bitcoin futures, the commodity is Bitcoin, and the contracts are never redeemed for actual bitcoins.
Futures contracts, like other financial derivatives, can be treated as commodities in and of themselves; some companies actually want to sell Bitcoin ETFs (exchange-traded funds), which amount to bets on the value of the Bitcoin futures market. The US Securities and Exchange Commission has thus far not approved these products; Bitcoin futures are offered by only a small number of financial institutions, and with much harsher restrictions than other futures contracts, because the price of Bitcoin is so fickle. A derivative based on another, particularly unstable derivative is currently seen as too risky, even for the Wall Street regulator.
OKEx, which is based in Hong Kong but has expanded internationally over the course of this year, offers futures trading in both Bitcoin and Bitcoin Cash. Futures based on the latter have not been approved by any regulated business.
Why cancel the contracts?
Bitcoin Cash, which is the fourth most valuable cryptocurrency on the market, has been going through a civil war lately which has left its value up in the air - it stands at $6.1 billion according to coinmarketcap.com.
As Finance Magnates has been covering, it has split into two different coins - Bitcoin Cash ABC and Bitcoin Cash Satoshi Vision - which are both backed by powerful groups (at least in Bitcoin Cash community terms) which not only refuse to work together but are actually hostile to each other. The split only happened a few days ago, and it is not yet clear which version of the cryptocurrency will prevail.
One of the results of the disruption is that the value of the cryptocurrency has been plunging dramatically (taking the rest of the coins with it). Thus, OKEx's decision to deliver the contracts before their due dates caused losses to some investors.
According to Bloomberg, one fund manager, Qiao Changhe, lost $700,000.
The exchange explained: "Due to the upcoming hard fork, strong Volatility is observed in the BCH spot and futures markets. We expect an even greater volatility...The final outcome of the BCH hard fork is still unpredictable, and so are the responses of other constituent exchanges to the new forked coins."
On why it chose the last traded prices as a reference for settling the contracts: "There is no Bitcoin ABC trading pair with enough Market Depth and trading volume to compose an index for delivery."
On why it did not warn investors in advance: "...an early announcement may make room for market manipulation and cause loss to our users. Therefore, we decided to give a short notice in order to maintain the fairness and stability of the market."
Apologise for the inconvenience
This is not the first time that the exchange has pissed off its customers.
In March 2018, the exchange was accused of inventing most of its trading volumes by a cryptocurrency trader, who presented fairly convincing evidence. The exchange denied the claims.
In August, another trader made a loss of $460 million trading on the exchange, and the company's insurance pot only covered around $75,000. Other traders had to foot the bill.
