Socialized clawback at the crypto-exchange? Time to consider a different way of trading - 4 advantages of trading cryptos with a broker

  • A crypto-exchange took money from traders to compensate another.
  • Exchanges have had a serious of issues, and this is not the first one. 
  • Cryptocurrencies can be traded in a different manner. 

A trader at OKEx, a crypto-exchange, made a big leveraged bet on Bitcoin. It had a notional value of no less than $416 million. The company saw that, called him, and asked him to partially close the position. When he refused, and they decided to freeze his account to prevent him from enlarging the risk. However, the price of Bitcoin tumbled, causing a liquidation of the account.

But it did not end there. 

The toxic mix of a significant position, enhanced leverage, and a sharp market movement meant that OKEx needed to cover losses beyond the client's account. It then used its "socialized clawback" protocol. Other futures trades were forced to give up 18% of their profits.

So, every crypto-trader that had a profit but did not realize it lost quite a bit of money. This is comparable to a bank that asks its clients to help it when a big loan went bad. Needless to say, many were angered. 

This is not the first "socialized clawback" and not the first issue with crypto-exchanges. Never-ending "maintenance modes," hacks, market manipulation, and outright bankruptcies have haunted cryptocurrency exchanges and their clients since Mt. Gox several years ago and until today.

Looking beyond crypto-exchanges

Maybe there is a better way.

To trade cryptocurrencies, one does not need to trade at a crypto-exchange. Brokers that specialize in forex have also dipped their feet into digital coins and have learned quite quickly. 

Here are some of the advantages of trading with a broker:

1) Costs

Exchanges charge various fees for trading, withdrawing, passing your digital money to another exchange and hefty fees for depositing using a credit card. Forex brokers also make money, but this is done via spreads between the buying and the selling price. 

The long-running competition between brokers has lowered these spreads. Moreover, these spreads are easily understood, and there are fewer surprises. As always, it is important to make comparisons, but at least calculating the cost of trading with a broker is easier.

2) Ease of use

It begins with the sign-up processes which are smooth with brokers and have been refined for years. Onboarding at cryptocurrency exchanges can be like jumping fire hoops. The rigorous documentation that is needed makes everything quite cumbersome. Also, you need to create a wallet. If the exchange does accept fiat currency, you first need to obtain Bitcoin or Ethereum elsewhere. 

Trading is more comfortable with a broker. The charts and technical tools are sophisticated and allow precise calculations whether it is the industry-standard Meta-Trader or a proprietary platform developed by the broker. Many exchanges offer a more limited experience. 

3) The ability to go short

All crypto-boats rose with the 2017 tide, but 2018 is different. Many cryptocurrencies suffered losses. With a broker, you trade against the underlying asset by going short. Going short means first selling at a high price and then buying at a lower price. So, a profit can be made when the cryptocurrency is falling. 

By buying the cryptocurrencies and holding them in a wallet, going short is impossible. 

4) Security

We have now come full circle to the primary motivation to look elsewhere. Sure, some forex brokers are better than others, and the worst ones go out of business. However, the better ones are regulated. If you have an issue with a regulated broker, you can complain to the regulator.

Those that suffered from the  "social clawback" have no one to go to. And it will not have happened in the first place, as the broker appreciates the regulatory stamp and fears the regulator. 


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