Huobi’s BitVC to Do Away with Socialized Losses for Negative Balances

Huobi’s bitcoin futures trading exchange, BitVC, will be ending its controversial system of social losses for negative balances.

The system came under fire from some users last year, when some traders opened highly leveraged positions but the market worked quickly against them. BitVC was unable to close out positions in time to avoid negative balances due to insufficient liquidity in the market.

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To cover the losses, other users’ profits were “taxed” proportionately at contract settlement time. Several users complained that the system was unfair, although they did reportedly agree to it based on the terms of service. Other bitcoin futures exchanges, including that of OKCoin and 796, also employ socialized loss models, also to some user discontent.

The exchange’s new strategy will take a different approach by preventing negative balances in the first place. Should a forced liquidation be triggered while there is inadequate liquidity in the market to close positions at desired levels, the system will automatically reduce the leverage of open counterparty positions to ensure that orders can be filled at the target price.

Speaking to DC Magnates, Huobi Senior Analyst Robert Kuhne acknowledged that there’s no perfect solution, but the new scheme is more fair and efficient.

The new model effectively places the risk back on the loser’s counterparty, which is more in line with the model used on traditional futures exchanges. It can be compared, in a sense, to a more capitalistic and less socialized way of distributing trading wealth. Only here, the counterparty risk is eliminated in the first place, which also reduces the level of systemic risk.

The change will take effect this Saturday, March 7.