By design, one of the largest Bitcoin exchanges has historically created artificial volatility in Bitcoin derivatives. Now with the proliferation of newer derivatives exchanges that are simply forking the existing infrastructure, that same risk is becoming systemic and damning to the progress of Bitcoin’s adoption. The Alpha5 team finds it troubling, and we wanted to highlight what this practice entails, so that otherwise unsuspecting traders remain cognizant of the risks when engaging with such venues.

For illustration:

A trader deposits 1 BTC into their account; this amount is on the Lowest Risk Limit tiers.

Assume the trader then buys $670,000 equivalent in this perpetual swap at $6,700.

This is effectively 100x leverage (disregard fees for now), and the 1 BTC is consumed as Initial Margin.

Let’s assume the maintenance margin is 0.5%. That means that if the account value drops below 670,000/6700*.005= .5 BTC, then the liquidation logic is triggered. This type of loss would be experienced at:

(1/6700–1/x)*670,000 = (1–0.5) BTC, where x = 6,666.60.

Illustration of overly aggressive liquidation, creating artificial price volatility

In the Lowest Risk-Limit Tier, any open orders will be cancelled to see if this helps the margin situation (in this case, there are no other orders).



If that fails, the liquidation engine will attempt to liquidate the trader NOT at 6,666, but at the bankruptcy price, or the price at which there is 0 margin (equity) left. In this case, that would be 6,633.

In this scenario, the system will try and sell 33 points BELOW where the market is. Reflect this on the topside, and you will see the same. Multiply it by the number of liquidations, and what you get is artificial volatility, to the detriment of the trader and Bitcoin’s reliability, but for the benefit of the exchange.