BCH contract forced delivery on the eve of the fork

In less than 24 hours, Bitcoin Cash will face a life-and-death test.

Unlike previous forks of Bitcoin, the final result of this BCH community split is unlikely to lead to a symbiotic situation of "both sides go their separate ways", and the risks caused by this will first be reflected in the trading market.

On the eve of the network upgrade, BCH spot prices plummeted, market bearish sentiment increased, and contract trading showed a one-sided trend. On November 14, OKEx, an exchange that provides contract products, chose to allow users to deliver BCH contracts in advance; BBX Digital Asset Contract Exchange also took the same approach and announced the timetable for the "forced delivery" of BCH perpetual contracts on the site early.

With the future of the transaction subject unclear, the risk control test caused by the BCH fork directly hit the exchange, bringing about some controversial voices. The market chain reaction brought about by the BCH split is unlikely to subside in a short time.

BCH plummets, OKEx sets price limit on contracts to prevent malicious short selling

On the eve of the fork, the price of BCH plunged sharply. Yesterday (November 14), the highest price of BCH was $552 and the lowest price fell to $478, with a fluctuation of up to 13%. The fluctuation of spot prices affected its contract trading market.

At 11:00 am on November 14, when the BCH spot price index hovered at a high of $513, the latest price quote for the OKEx weekly contract was $405, with a spot premium of more than $100, reaching 26%, setting the largest spot-contract premium rate in the history of BCH trading. As both the spot and contract prices of BCH fell, the price difference between the two gradually widened.

That morning, a video about an investor who made a profit of 28.26% but was unable to close his position to take profit sparked discussion in the OKEx contract user communication group. The user said that he opened a long position in a quarterly contract when BCH was at $404.91, making a profit of 0.149 BCH. When he wanted to close his position and sell the order, he found that he could not trade.

It is reported that this situation is because the premium between spot and contract in the market triggered OKEx's "price limit mechanism". This means that when the price of the user's closing sell order (such as the user's long price of 404.91 US dollars) is lower than the latest price of 405 US dollars, the limit price is triggered and the pending order cannot be executed. This rule also prevents users from continuing to open short positions when the BCH weekly contract price is 405 US dollars, and the same is true for the "next week" and "quarterly" contract trading areas.

OKEx introduced the price limit rules for contracts in January this year.

After logging into the OKEx official website, I found that the platform announced the "Contract Price Limit Mechanism" in January this year. The announcement of the mechanism shows that the price limit is one of the important risk control means for the platform to protect investors and prevent the market from being manipulated. "If there is no price limit rule, a small number of traders can use a small amount of funds and high leverage to cause large fluctuations in contract prices and artificially create large-scale apportionment."

In this regard, Fengchao Finance consulted OKEx Financial Market Director Li Zhikai, who explained that the platform's restrictions on short selling are based on existing price limit rules. Contract transactions of listed currencies follow this public rule, and it is not targeted at BCH. "Of course, this BCH fork event is very unique, and we are also closely monitoring the situation."

This rule prevents the market from being manipulated to a certain extent, but it also raises another problem: the inability to trade means that users cannot stop profits or losses in time. Just when the contract users were anxious, at 4 pm that day, OKEx suddenly issued an announcement about the early delivery of BCH contracts.

“To deal with the risk of BCH fork, exchanges are crossing the river by feeling the stones”

OKEx executed the settlement at 5:00 pm on November 14. After the settlement, the spot price of BCH dropped from $523 to $480, and the price of the currency dropped by another 8.2%. For investors who originally shorted on the platform, the income was undoubtedly greatly reduced, but for those who longed, the loss was also reduced.

On the eve of the fork, BCH spot price plunged

After the "early delivery" rules were announced, users' reactions were polarized. A user with the nickname "Suit Thug" in the community believed that "closing positions to ensure safety" was the best way to deal with uncertain market conditions, while a user named "Xiao Changzong" complained about the exchange's "customized rules."

One of the focuses of users' complaints is that the time from OKEx's announcement to the execution of "early delivery" was less than two hours, which did not leave investors enough time to react and operate; in addition, the delivery was not executed according to the spot price, but was calculated according to the "last transaction price of each contract", resulting in damage to the profits of users who adopted hedging strategies and short selling.

Less than half an hour after the notice of early delivery was issued, it triggered market discussions, and OKEx quickly issued another announcement. As for why it did not notify in advance, the platform explained that if it did, it would be more likely that the latest transaction price before delivery would be manipulated, causing losses to some customers. "Unless there are extremely special circumstances like the BCH fork, OKEx will not deliver contracts without prior notice."

Regarding the dispute over the delivery price, OKEx stated that the underlying asset BCH (BitcoinABC) of the BCH contract on the platform has not actually been generated yet, and it is impossible to find a BitcoinABC pair with good depth and large trading volume in the market as an index for delivery.

“It is hard to say whether the exchange’s approach is right or wrong. In order to deal with the risk of BCH forks, the exchange is actually crossing the river by feeling the stones.” An industry insider analyzed that this situation is similar in the traditional securities market. “Just like Tencent’s stock split, all transactions have to be suspended and re-settled. However, in the cryptocurrency circle, it is very likely that only one chain will survive on both sides of the fork. This is the first time that the exchange has encountered this, which is different from securities.”

After the fork of ETH and BTC, the change of the underlying blockchain network protocol leading to the emergence of two assets is no longer a new thing for participants in the cryptocurrency field. However, unlike the BTC fork, BCH quickly formed its own community consensus before and after the independent development of the Bitcoin network. Although it has been competing for the identity of "real Bitcoin", under the independent consensus and development path, the BCH market has formed its own pricing mechanism.

The fork of BCH is likely to lead to a long-term battle of computing power, and the fate of both chains is uncertain. Although many exchanges will follow the precedent of Bitcoin fork and distribute "candy" to users, no one can predict whether the "candy" tastes good, and price fluctuations and asset security will directly test the risk control capabilities of exchanges.

"Unlike the multiple forks of Bitcoin last year, the two opposing parties in the BCH community are evenly matched this time. It is difficult to say who will win in the end. The drastic market fluctuations can easily cause large-scale liquidation of investors." BBX Technical Director Journey told Fengchao Finance, "The suspension of contract trading is mainly to protect the interests of investors."

Currently, both OKEx and BBX have announced the forced settlement mechanism on the eve of the fork, and Huobi has also suspended the lending service for BCH spot leveraged trading on the site.

On the eve of the BCH fork, various exchanges responded urgently, and the chain reaction of the battle between BCHABC and BCHSV on the secondary market will continue.