Traders Complain From Binance: “Bitcoin Short Positions Canceled”
However, the cancellation of the shorts was systematic – this process is called auto-leveraging (reducing leveraged risks / auto-deleveraging).
What is Auto-deleverage and how can Bitcoin short positions be cut?
In the futures market, traders use debt or leverage to trade with larger capital. Binance allows, for example, an investor to use 125 times the starting capital. If a user has $ 1,000, the user can trade up to $ 125,000.
The role of a cryptocurrency exchange is to match orders between buyers and sellers. Therefore, if A trader wants to shorten Bitcoin to $ 9,500; The role of the exchange is to find the B trader who wants to buy BTC for the same price.
The problem occurs when Bitcoin price sees a sudden increase or decrease. More traders rush to create short positions in Bitcoin, and as the price decreases rapidly, an imbalance occurs in the order books.
When there is a large order book inequality, this potentially causes some liquidation and may cause the Bitcoin price to drop to abnormal prices. Such a price trend can be exemplified by the fall of BTC price to $ 3,600 on BitMEX on March 12.
Large Bitcoin futures exchanges such as BitMEX and Binance Futures use this system called auto-deleveraging to keep order books stable. When the insurance fund is not sufficient to cover the liquidations, other transactions may be discontinued to cover the remaining liquidations.
Binance Futures explains:
“WHEN A TRADER’S ACCOUNT SIZE FALLS BELOW 0, THE INSURANCE FUND IS USED TO COVER LOSSES. HOWEVER, IN SOME EXCEPTIONAL VARIABLE MARKET ENVIRONMENTS, INSURANCE FUND MAY NOT BE ABLE TO COVER LOSSES AND OPEN POSITIONS NEED TO BE REDUCED TO COVER THEM. ”
In such a case, it is likely that the transaction amounts of high leverage transactions will be reduced first. Investors using 75 to 125x are usually in the highest percentile and their trades are interrupted first in abnormally variable market conditions. A trader explained:
“WHILE IN A POSITION, THERE IS A LIGHT ON THE TRADING PAGE SHOWING THE“ AUTO-DELEVERAGE ”QUEUE. IN THIS CASE, DELEVERAGE IS USED AS A LIQUIDATION INSURANCE TO TAKE PRECAUTIONS AGAINST CONSECUTIVE LIQUIDITIES RESULTING IN MEGA DUMP. HIGH LEVERAGED TRANSACTIONS ARE USUALLY IN THE FIRST PLACE. ”
Can auto-deleveraging states be reduced?
Auto-deleveraging is very common in the cryptocurrency market because Bitcoin is significantly more volatile than most traditional assets.
The tendency of the Bitcoin market to change the price direction in a short period of time makes it difficult for the stock markets to maintain the balance in the market.