Poloniex's taking money from its customers to cover its loss

[countryfree]

https://medium.com/circle-trader/overview-of-btc-margin-lending-pool-losses-a2f0905aaa56

Scary. I used to think lending money on Poloniex or Biftinex was safe. Not anymore.

Today, we recognized the generalized loss across lenders in the BTC margin lending pool. As a result, the principal of all active BTC loans as of 14:00 UTC today has been reduced by 16.202%.

So, if you were lending money on Poloniex, you've lost 16.202% of it... Man, that hurts!

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[figmentofmyass]

Crypto exchange Poloniex revealed in a post Thursday that lenders in its bitcoin margin lending pool suffered a loss of 1800 BTC — roughly $13.5 million at current market prices — due to a flash crash in the Clams (CLAM) market on May 26.

what a travesty. they shouldn't allow leverage on such illiquid markets. bitcoin and the larger altcoins are one thing, but with low volume altcoins like this---especially on a low volume exchange like poloniex---it's a disaster waiting to happen.

there's no way they're gonna claw back all those coins from borrowers. i don't even think they legally can. why would borrowers deposit extra money to cover losses above and beyond what their positions entailed?

[yefi]

I'd say that both lenders and Polo didn't properly analyse the risk.

On Polo's half, it should have been obvious not to provide leverage on such an illiquid and clearly manipulated market as CLAM. This isn't even the first time Clam has done this. There was a nearly identical crash back in October 2017.

Lenders, for their part, should have known better and factored in counter-party risk. Losses have been socialised before on exchanges, such as at OKCoin and Finex. Polo definitely isn't immune.

[countryfree]

I see Poloniex as fully responsible. I blame their software.

We live in an age of superfast trading by bots, and there's a protection built-in with margin trading operations. As soon as the loss reaches the sum of money traded to begin with, the software should have terminated the trade in a second. It should be instant. Poloniex's blaming the lack of liquidity in the Clam market, that is a problem they should have been aware of, and lenders aren't responsible for it.

[squatter]

We’re pursuing the defaulted borrowers to get them to repay the BTC they owe to lenders.

What exactly does that mean? Pursuing them, legally? Poloniex's system shouldn't have allowed them to leverage positions that couldn't be liquidated. We've seen socialized losses before -- that's not a surprise to me. But they make it sound like they're coming after the defaulted borrowers. It wasn't their fault.

[yefi]

I see Poloniex as fully responsible. I blame their software.

We live in an age of superfast trading by bots, and there's a protection built-in with margin trading operations. As soon as the loss reaches the sum of money traded to begin with, the software should have terminated the trade in a second. It should be instant.

The speed of their software is not the problem. The problem is one of imbalance. They allowed large asymmetric positions which dwarfed the actual market.

[illyiller]

Another nail in the coffin for Poloniex. Circle must be really kicking themselves now for this acquisition.

It's a bit troubling they are hanging lenders out to dry like this. I'm surprised to be honest. Other exchanges have covered much bigger losses in flash crash situations. It really doesn't bode well for future market liquidity. Aren't lenders going to leave en masse?

[stormos]

Are coinlend users affected?

[brobbel]

Are coinlend users affected?

Coinlend is only a tool. When you have BTC on Poloniex which was lend using Coinlend then you're affected. When you only have other coins AND/OR only have coins on other exchanges then you're not affected.

[countryfree]

Another nail in the coffin for Poloniex. Circle must be really kicking themselves now for this acquisition.

It's a bit troubling they are hanging lenders out to dry like this. I'm surprised to be honest. Other exchanges have covered much bigger losses in flash crash situations. It really doesn't bode well for future market liquidity. Aren't lenders going to leave en masse?

I will. I have accounts at all exchanges, but I will stop doing business with Poloniex.

I've kept my Binance account when they've been hacked, because that can happen to everybody, I've also kept my Bitfinex account, because they were the victim of a shady partner (Crypto Capital), but I blame Poloniex here. And Circle which is behind. They should cover the loss. Bitfinex has lost $850 millions, but their customers haven't lost a cent.

I blame Poloniex their software, and their judgement. So does Yahoo:

https://finance.yahoo.com/news/poloniex-leaves-itself-open-legal-000333198.html

[magneto]

I doubt as a margin lender you can do anything but to accept the outcome - given the fact that their terms of service would have had these things written down beforehand.

However, I don't really understand why they didn't take the appropriate actions that they talked about in their medium post BEFORE the flash crashes actually happened that led to these losses, as opposed to after. It just goes to show that margin lending isn't as risk free as everybody thinks.

They should have recognised these liquidity issues within certain markets way beforehand and they were pretty much the only exchange offering margin trading for these pairs at that point anyways.

[countryfree]

I wasn't naive. I've learned how the system worked by trial and error. I've done margin trading a few times, and it happened to me once that a position I had was liquidated to prevent going above my collateral. That was good. That made me feel confident that lending was very safe. The system had prevented any loss to occur. The software worked fine back then.
Poloniex is definitely responsible if something went wrong.

It's also very bad for this company, because frankly they're not newbies. Poloniex is one of the oldest trading places. It was the best and largest service some 2 years ago, but by pooling the loss of a the few among all their honest and loyal lenders... It is very, very bad for their reputation, to say the least.

[PrimeNumber7]

At the high, the marketcap of Clam was about 8585 BTC, and at the May 25 low, the marketcap fell to about 1939 BTC, or a difference of about 6645 BTC. Poloniex allows for 2.5x margin trading, which means the value of the margin longs, plus the value of the collateral was just under 35% of all Clam outstanding. This is assuming all margin long positions were opened at the high and sold at the low, that margin was maxed out on all positions, and all positions were secured entirely by Clam.

The losses exceed the trading volume of Clam during the flash crash, so it is probably safe to assume not all positions were sold immidiately. If no Clams were sold, and their value was written down to zero, as few as 21% of Clams outsanding could have been in open positions. I would believe that Poloniex sold the open Clams positions they were unable to sell in the open market, probably at a fairly large discount.

Poloniex is the only major exchange Clam trades on, so any major price action would have occured on Poloniex. Overall, the losses are the result of poor risk management on the part of Poloniex. They should not have allowed such a large percentage of coins outstanding to be bought in margin long positions. I also suspect they initially were automatically closing out margin positions in mass before someone pulled the plug to automatic licquidations that probably caused a large portion of the price decline.

I don't think this would have happened on a more professional exchange.

[gentlemand]

I'm amazed at how pisspoor Circle's handling of Poloniex has been. They've pretty much done nothing with it. Even if they're only placeholding they should at least make an effort for the existing users.

As for this, they allowed this to happen. They should be picking up the bill. Stuff like this will only speed up its drive into oblivion. In a space filled with utter waste $400 million for this looks like one of the biggest cash bonfires of all.

[countryfree]

I'm amazed at how pisspoor Circle's handling of Poloniex has been. They've pretty much done nothing with it. Even if they're only placeholding they should at least make an effort for the existing users.

As for this, they allowed this to happen. They should be picking up the bill. Stuff like this will only speed up its drive into oblivion. In a space filled with utter waste $400 million for this looks like one of the biggest cash bonfires of all.

I can only agree.

Allowing huge margin trading on that Clam sh*tcoin was unprofessional, and now asking their customers to pay for that mistake is even worse. I've started to withdraw my funds... You wonder what's next because I cannot a trust a company where this happens. No investor can. Your coins are not safe at Poloniex.

[yefi]

Poloniex allows for 2.5x margin trading, which means the value of the margin longs, plus the value of the collateral was just under 35% of all Clam outstanding.

How are you calculating the 35%? Based on your assumptions, I'm doing: -1800 = (1939/8585)x - (2.5/3.5)x, which gives 3,685 BTC for the longs and collateral, or 43% of all CLAM.

The losses exceed the trading volume of Clam during the flash crash, so it is probably safe to assume not all positions were sold immidiately. If no Clams were sold, and their value was written down to zero, as few as 21% of Clams outsanding could have been in open positions. I would believe that Poloniex sold the open Clams positions they were unable to sell in the open market, probably at a fairly large discount.

You are right. 444 BTC of volume occurred in the first five minutes, but that only took the price down to 180K sat. There was less than 150 BTC down from there to 53K sat. That's not enough to account for a 1800 BTC loss. At most, it accounts for only 650 BTC.

[PrimeNumber7]

Poloniex allows for 2.5x margin trading, which means the value of the margin longs, plus the value of the collateral was just under 35% of all Clam outstanding.

How are you calculating the 35%? Based on your assumptions, I'm doing: -1800 = (1939/8585)x - (2.5/3.5)x, which gives 3,685 BTC for the longs and collateral, or 43% of all CLAM.

The change in market cap was 6647 btc. I got this based on 3,625,200 outstanding, a high price of 0.00236825 btc, and a low price of 0.000535 btc. The high market cap was 8585 btc.

The 1800 BTC loss made up 20.96% of clams, if they were bought at the high. In other words, you could spend 1800 btc to buy 20.96% of clams outstanding at the high price. At 2.5x leverage, Poloniex's customers need to have collateral valued at 40% of margin loans outstanding, calculated by x = 1/2.5. 40% of 20.96 is 8.38, so an additional 8.38% of clams outstanding would need to be used as collateral for an 1800 BTC margin loan, bringing the total to 29.34% of clams.

I believe the above is actually how the margin system still works on Poloniex, and this actually results in traders being able to get 3.5x leverage, because they can use 1 BTC to buy 3.5 BTC worth of a position if the collateral is the same as the trading pair. I was able to replicate my mistake in saying that 35% of clams outstanding were used in margin loans plus collateral by incorrectly assuming a total of 2.5x leverage, or borrowing 1.5x the value of the clam collateral, or having equity of 60% of the margin loan.

The losses exceed the trading volume of Clam during the flash crash, so it is probably safe to assume not all positions were sold immidiately. If no Clams were sold, and their value was written down to zero, as few as 21% of Clams outsanding could have been in open positions. I would believe that Poloniex sold the open Clams positions they were unable to sell in the open market, probably at a fairly large discount.

You are right. 444 BTC of volume occurred in the first five minutes, but that only took the price down to 180K sat. There was less than 150 BTC down from there to 53K sat. That's not enough to account for a 1800 BTC loss. At most, it accounts for only 650 BTC.

The 30 minute tick with 444 BTC traded has a low price of 0.00175 BTC, which is at most ~253,000 clam, or ~6.9% of clam outstanding. The following two 30 minute ticks only have about 20 BTC traded in each tick, with a low of 0.00112 BTC, with a maximum traded of about 35.7k clam, or under 1% of clam outstanding.

They should be picking up the bill.

Most exchanges that offer margin lending would cover losses in these types of situation. There is language in the TOS that says the lenders are taking the risk that borrowers will be unable to repay the margin loans, and lenders may not be repaid the full amount.

The reason exchanges will often cover losses is because if they do not, lenders will not want to use the platform to lend, which will lead to higher interest rates for borrowers, which will lead to lower trading volumes and lower profits for the exchange. I guess Poloniex thought the 1800 btc loss was not enough to justify keeping confidence in their lending platform. If they had the money, they could have bought the clam, and sold it over time at a higher price, and prevented the market from dumping from all the margin liquidations. I expect most lenders to stop using Poloniex to lend out their coins.

[timerland]

https://medium.com/circle-trader/overview-of-btc-margin-lending-pool-losses-a2f0905aaa56

Scary. I used to think lending money on Poloniex or Biftinex was safe. Not anymore.

Today, we recognized the generalized loss across lenders in the BTC margin lending pool. As a result, the principal of all active BTC loans as of 14:00 UTC today has been reduced by 16.202%.

So, if you were lending money on Poloniex, you've lost 16.202% of it... Man, that hurts!

This will likely push interest rates on other lending platforms up as well, given the fact that the market is now given a lot more awareness about how potentially risky their investments are, while they previously thought it was something that was risk free.

I'm surprised that Polo isn't offering to at least compensate in some way, though, given the fault is probably partially on them for offering margin trading on illiquid markets anyways.

I doubt their 'debt recovery' will go that well anyways. It's probably extremely difficult to get anyone, especially people with high amounts invested at the time to pay back their dues, especially when their positions should have automatically closed in the first place.

[yefi]

The 1800 BTC loss made up 20.96% of clams, if they were bought at the high. In other words, you could spend 1800 btc to buy 20.96% of clams outstanding at the high price. At 2.5x leverage, Poloniex's customers need to have collateral valued at 40% of margin loans outstanding, calculated by x = 1/2.5. 40% of 20.96 is 8.38, so an additional 8.38% of clams outstanding would need to be used as collateral for an 1800 BTC margin loan, bringing the total to 29.34% of clams.

I believe the above is actually how the margin system still works on Poloniex, and this actually results in traders being able to get 3.5x leverage, because they can use 1 BTC to buy 3.5 BTC worth of a position if the collateral is the same as the trading pair. I was able to replicate my mistake in saying that 35% of clams outstanding were used in margin loans plus collateral by incorrectly assuming a total of 2.5x leverage, or borrowing 1.5x the value of the clam collateral, or having equity of 60% of the margin loan.

Thanks. I see from your calculations that Clam would be treated as having zero value. That would tie in with my equation where 1939 is replaced by 0.

[countryfree]

I'm surprised that Polo isn't offering to at least compensate in some way, though, given the fault is probably partially on them for offering margin trading on illiquid markets anyways...

...especially when their positions should have automatically closed in the first place.

I'm getting legal advice, and I've received confirmation that pooling losses is illegal.
The default is 100% due to Poloniex's negligence. If the other trading platforms didn't allow margin trading on CLAM, that's because they were smarter.