The digital currency exchange BitMEX has announced that it will compensate investors affected by an unexpected auto-trigger event that liquidated their positions.
A heavy swing in market prices on April 2, 2019, triggered an event known as ‘auto deleverage,’ which subsequently liquidated open positions of some users. The cryptocurrency exchange blamed the situation on a technical fault and has since apologized for the inconvenience.
Volatility Triggers Auto Deleveraging
Auto deleveraging occurs when the margin on a short trade exceeds a predetermined threshold beyond which the investment turns into a loss.
In a blog post, BitMEX clarified the string of events that occurred on April 2, 2019, which led to investor positions being deleveraged. The step was meant to be a last resort measure for both equity and crypto exchanges to limit losses and liquidate short positions.
On the day of the incident, however, Bitcoin (BTC) witnessed a sudden $1,000 price swing and sent the entire crypto market in an upwards frenzy. The volatility was detected as a negative factor by the BitMEX algorithms, causing the platform to automatically deleverage approximately 200 open short positions worth $500 million.
The crypto community was quick to point out BitMEX’s error on social media platforms. Angry investors who had missed out on their opportunity to make a great return expressed the most frustration. Many demanded to know why the exchange’s insurance fund was not used to cover these positions.
BitMEX, which had praised itself for obtaining insurance as early as last month, said that the terms of the insurance were set according to liquidations made by each account. The older positions expired on March 29, 2019, and it failed to reallocate funds to front month contracts. BitMEX faced even more backlash after these comments, however, committed to using insurance proceedings from May 2019 to compensate users for their best case profitability scenario.
Crypto Exchange and Security
The incident triggered a fresh debate on the steps taken by centralized cryptocurrency exchanges to safeguard user crypto. Disgruntled users whose positions were auto deleveraged questioned if the move was motivated by self-gain.
BitMEX later clarified that it had made zero profits from the positions that were closed after the trigger. The exchange announced that it will be reaching out to every affected investor in a bid to improve transparency surrounding the string of incidents occurred on the day of the price spike.
Do you think BitMEX will be able to refund all the affected customers? Let us know your thoughts in the comments below.
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