Chinese bitcoin exchanges halts margin trading

Investing | January 23, 2017 By:

BTCC, OKCoin and Huobi, three of the world’s largest bitcoin exchanges, announced they have halted margin trading services.

The exchanges confirmed changes rolled out quietly roughly a week ago when customers reported restrictions on lending-based services.

These changes follow a recent inspection of cryptocurrency platforms carried out by the People’s Bank of China (PBOC).

The Chinese exchanges have publicly asked to be regulated, but haven’t made any public suggestions of what such regulations may entail. The public, therefore, seems to be left in the dark by both Chinese exchanges and Chinese regulators, so leaving us to read between the lines, with the latest move suggesting PBOC clearly intends to take significant measures.

Margins and futures are a basic and necessary instrument for any financial market. They reduce volatility, add liquidity, provide risk management functions and increase the maturity of any market. A margin of maximum 20x for most Chinese exchanges compares to margin offers of 200x and some even as high as 2,000x for foreign exchange trading.

Without margin, counterparty risks significantly increase as individuals have to deposit huge sums on exchanges that may go bust for a variety of reasons. Moreover, as one would not be easily able to short, bubbles can form that quickly get out of hand as was the case in November 2013 when price went up by $900 in days to then crash to $200.