Bitcoin trading capital chain investigation: Up to 5 times leverage

Introduction

As a virtual commodity, Bitcoin trading also introduces leveraged trading, with the highest leverage reaching 5 times. At the same time, there have always been doubts in the market about money laundering in Bitcoin trading.

The abnormal fluctuation of Bitcoin has attracted great attention from regulators. After the central bank’s Beijing and Shanghai headquarters respectively summoned the heads of three Bitcoin trading platforms last Friday, there were reports that the regulatory authorities would discuss the establishment of a third-party Bitcoin custody platform to ensure the security of Bitcoin transactions.

A reporter from 21st Century Business Herald learned that the three Bitcoin platforms that were summoned last Friday included Huobi, Bihang and Bitcoin China.

However, on January 10, an insider of Huobi responded to a reporter from 21st Century Business Herald, saying, "The platform has not yet received any notification from the relevant third-party custodian."

Zhang Hua, vice president of Leiying Enterprise, told the 21st Century Business Herald reporter that "the digital asset trading industry is still in its emerging stage, and Bitcoin trading funds have not yet formed a standardized third-party custody system. I personally expect that in the next two to three years, there may be substantial regulatory measures introduced."

It is worth mentioning that as a virtual commodity, Bitcoin trading also introduces leveraged capital trading. In addition, behind the popularity of Bitcoin trading, there have been constant doubts about money laundering through Bitcoin trading. So, what is the truth behind the Bitcoin trading capital chain? 21st Century Business Herald reporters launched an investigation on this.

Margin trading is common

"At present, leveraged trading of Bitcoin is quite popular. Some investors will adopt leveraged trading methods, including long and short positions. The general leverage ratio in the industry is about 3 times. It will be adjusted dynamically according to the trading activity, etc." Zhang Hua told the 21st Century Business Herald reporter. "On January 5, the price of Bitcoin fluctuated sharply, with a fluctuation of up to 32.55% throughout the day. On the same day, some investors who operated with leverage had their positions liquidated, which was mainly due to the rapid and drastic price fluctuations throughout the day."

On the same day, an insider of Huobi.com confirmed that the platform provided some margin trading, and the platform would charge a margin trading fee of 0.1%. In addition to the platform, third-party institutions would also participate in margin trading.

“The maximum leverage is about 5 times. However, the platform will make timely adjustments based on trading conditions. For example, on January 5, Huobi made risk control adjustments and the leverage ratio was reduced to 2 times, mainly to control investor risks. Despite this, some investors were still hit and forced to close their positions,” the person said.

"Specifically, let's assume that the current bitcoin price is 6,000 yuan, and a user has 6,000 yuan of his own funds and is bullish on the market, so he borrows 4 times the funds, a total of 30,000 yuan, to buy 5 bitcoins. As a result, the bitcoin price falls, and when his actual assets are close to 110% of the platform's loaned funds, the platform will remind the user to close the position to stop loss or increase the margin." The aforementioned Huobi insider said. "Therefore, when the user's actual assets reach 110%, the platform will force the position to be closed and put his assets on the market price. The principle is the same as other financial markets. That is to say, according to this user's price, when the bitcoin price falls to 5,280 yuan, if the user does not stop loss or increase the margin, the platform will force the position to be closed."

OKCoin founder and CEO Xu Mingxing responded to a 21st Century Business Herald reporter that day, "The leverage ratio of our platform is relatively small. When the price fluctuates greatly, we generally suspend the leverage business, so there are very few users on our platform who have liquidated their accounts."

Chen Gang, co-founder of Kuoyue Technology, said, "For the platform, the core risk control lies in internal management, doing a good job of asset preservation, paying attention to risk control and liquidation, daily settlement, and daily reconciliation."

Cross-border arbitrage risk

In addition to the risks of market fluctuations, there have always been doubts about money laundering in Bitcoin transactions.

In this regard, Xu Mingxing emphasized that the five ministries and commissions had clearly stated in the "Notice on Preventing Bitcoin Risks" issued as early as 2013 that platforms should strictly comply with anti-money laundering.

"For example, if a user buys bitcoin from our OKCoin platform, we will first do relevant authentication, including checking the source of funds, the amount of assets, etc." said Xu Mingxing. "In addition, the anti-money laundering procedures of foreign banks and trading platforms are more complicated. If a sum of money or bitcoin comes out of thin air, no foreign institution will allow you to withdraw cash. You need to provide proof of the legal source of the funds. At the same time, the price of bitcoin is constantly fluctuating. Exchanging currency through bitcoin is a hypothetical operation, which is much more difficult than traditional methods."

The aforementioned Huobi insider also said that there are strict management regulations for user funds entering and leaving the platform. When opening an account, the platform will identify the user's identity and require the user to register with real name, name, ID number and other information. Moreover, you can only choose between a RMB account and a US dollar account. Once a decision is made, it cannot be changed.

"In terms of funds in and out, after users bind their bank cards, they can recharge the platform through transfer. Moreover, the recharge bank card and the authenticated user name must be consistent in order to complete the recharge and withdrawal." The person said.

On the same day, Huobi COO Zhu Jiawei also responded, "Huobi will conduct strict self-examination in accordance with the requirements of the central bank and other regulatory authorities and in accordance with relevant laws and regulations. It also plans to establish an industry alliance with various companies in the industry to conduct industry self-discipline and promote the establishment of industry standards."

In this regard, Zhang Hua also believes that cross-border arbitrage of Bitcoin is difficult to implement in practice. In theory, cross-border arbitrage can be achieved through domestic platform transactions. However, in practice, cross-border arbitrage also requires payment of costs. Each trading platform has a corresponding current fee policy, including transaction fees and withdrawal fees. At present, the withdrawal fee standard of domestic trading platforms is about 0.3% to 0.5%.

In addition, there is no limit on the increase or decrease of Bitcoin prices, and holding the currency may also face exchange risks caused by drastic price fluctuations. In terms of exchange compliance management, foreign trading platforms have relatively complete investor access management rules.

"If Bitcoin is really used to exchange foreign currency, it will lead to an imbalance in supply and demand, and the domestic price of Bitcoin will be much higher than the foreign price of Bitcoin. But currently the domestic price of Bitcoin is similar to the foreign price, and sometimes the foreign price is even higher than the domestic price." said Xu Mingxing.

"From the perspective of transaction characteristics, we can identify some coin purchases for the purpose of money laundering. The trading characteristics of this type of investors are that they rarely trade on a regular basis, and the single transaction volume is also very large," said Zhang Hua.

However, Zhang Hua also said, "It is inevitable that during the wild growth period of digital assets, some trading platforms will not strictly control this in order to attract traffic. But some compliant platforms will strictly abide by the relevant national anti-money laundering regulations and closely monitor abnormal transactions." (Editor: Wu Yanling)