Deribit Absorbs $235,000 Loss Caused by Liquidation Algorithm Bug

Cryptocurrency exchanges are often targeted by criminals in an effort to steal data or money. However, those are not the only threats they face. Some problems are the result of internal errors, such as a trading algorithm gone awry. In the case of Bitcoin futures exchange Deribit, its liquidation algorithm caused major losses. As a result, the company has put all Bitcoin futures on hold for a brief period.

Deribit’s Algorithm Messes up Badly

It is never good to see a trading platform or options exchange suffer at the hands of its own algorithm. While this piece of code is expected to perform flawlessly every single second of every single day, a bug can always appear out of the blue. Unfortunately, this also means such algorithms can cause major losses among users or even the parent company. In the case of Deribit, the company suffered a liquidation algorithm problem which forced them to halt Bitcoin futures.

The company has a December 29 open futures contract. This contract allows Deribit users to open margin positions on Bitcoin’s future price. While there had been no issues with these contracts previously, things suddenly went awry on September 15th. It took the company some time to figure out what was going on exactly, as such a liquidation algorithm issue had not occurred on the platform before.

Considering that various user accounts suffered heavy losses due to this event, the company suddenly found itself in a very awkward position. Around 105 BTC in losses were recorded as a result. That amount represents approximately US$400,000 and bankrupted some accounts in the process. Other clients suffered smaller losses due to the bug in the algorithm. To put it lightly, Deribit’s liquidation algorithm messed up badly.

Thankfully, it appears this issue has since been resolved. The team has contacted the largest market makers on the platform. Considering how some people made profits trading against this “bugged” algorithm at prices far above the market, some rectification is in order. The company also halted the Bitcoin futures contract while it was evaluating the damage and corrected account balances accordingly.

The Deribit team explained the situation as follows:

“We decided to refill the insurance fund further such that all other traders will remain completely unaffected and no profits will be socialized among other traders in this session at all. This was our first major incident since we opened doors for trading in the summer of 2016. We will work hard now to improve various liquidation algorithms such that this could never occur again. This might further delay the launch of new products like Ethereum futures and our upcoming spot exchange.”

When all was said and done, the exchange lost US$235,000 worth of Bitcoin. It is not an insurmountable loss, but it will set things back quite a bit. For now, Deribit will continue to operate as normal and the loss will be absorbed without reducing user balances to make up for the missing funds. The team will ensure its insurance fund is replenished with 25 Bitcoin in the coming days.