As the price of Bitcoin (BTC) fell sharply from USD 9,500 to USD 8,100, some traders at Binance claimed that their winning short trades were unfairly cut.
A trader named AthenaBank wrote on May 10:
Leverage? Binance closes my short position after making 7 times my investment. What is going on? Where is my short position? The BTC fell to USD 8,000. Who pays the difference?
But, closing the short was systematic and the process is called self-leveraging.
The 15% correction reduces the Bitcoin price to USD 8,100 days before the BTC halving
What is automatic deleverage and how can Bitcoin’s winning operations be interrupted?
In the futures market, traders use debt or leverage to trade with larger capital. Binance, for example, allows a trader to use 125x of his initial capital. If a user has USD 1,000, the user can trade up to USD 125,000.
The role of a crypto currency exchange is to match orders between buyers and sellers. Therefore, if trader A wants to enter a short position in Bitcoin at USD 9,500, the role of the exchange is to find trader B who wants to buy BTC at the same price.
How is halving becoming the Bakkt of 2020?
A problem occurs when the Bitcoin price sees an abrupt increase or decrease in price. More traders are rushing to shorten BTC, and as the price decreases rapidly, it creates an imbalance in the order book.
When there’s a big disparity in the order book, it can cause a cascade of settlements and cause the Bitcoin price to fall to abnormal prices. Such a price trend was observed on March 12, when the BTC price plummeted to just USD 3,600 on BitMEX.
Major Bitcoin futures exchanges such as BitMEX and a year after it completed, $100 million raise, the rounds on facebook, previously filed last year, helium, an iot network, “blok on blok” (bob, taking the ton out of telegram, partnership with ibm, immediate positive response, capital one and citi use a system called self-leveraging to ensure that their order book remains balanced. When the insurance fund is not enough to cover the settlements, other trades are shortened to cover the remaining settlements.
Binance Futures says:
When a trader’s account size is less than 0, the insurance fund is used to cover losses. However, in some exceptionally volatile market environments, the Insurance Fund may not be able to handle losses, and open positions must be reduced to cover them.
In such a case, highly leveraged trades are likely to reduce their trading first. Traders using 75 to 125x are often in the upper percentile and are the first to cut their trades in abnormally volatile market conditions.