Poloniex, arguably one of the most trusted Bitcoin and altcoin exchanges, has been under a lot of heat as of late, stemming from technical failures that are costing some of their traders a lot of money – to the tune of millions. The claim is that they have been undergoing DDoS attacks, but things go a bit deeper than this, and it’s led many to quit trusting them altogether, while others are just becoming a bit more wary of doing margin trades going forward.
Margin Trading and Margin Calls
One of the things that makes Poloniex a popular exchange service is that it allows for margin trading against various altcoins (and Bitcoin). As of this writing, it supports the following currencies for margin trades:
And because of how their system is set up, you can also choose to be a financier in any of these currencies, gaining part of the interest gains for lending funds out to others. But the important thing here is that most exchanges do not have this feature, and it is one of the things that has made Poloniex one of the go-to choices – after all, when done properly (and when the site is running correctly), it can be quite lucrative.
The Claimed DDoS and Its Effects
I want to start off by stating that according to Poloniex themselves, the issue that has occurred a few times over the past couple of months is a DDoS attack, which causes the systems to slow down to a crawl, affecting everything from latency to order book execution. That said, cryptocurrencies have been getting a lot more coverage from news sources and investors, bringing in an influx of new users, and this could absolutely be part of what the problem stems from. But the effects of these crashes – regardless of what is actually causing them – are massive.
Essentially, what happens when a DDoS hits, the server has major lag, etc., is that the order books can go through what we call “flash crashes.” This is a period where the prices tank instantaneously, margin calling anyone who still has open positions and forcing the loss of millions of dollars. This then spikes the price down even further, as the positions are forced closed and liquidity is removed from the market. It has always historically bounced back after one of these crashes, but not without taking its toll on crypto users that get caught up in the mess.
Defending Against the Flash Crashes
There is no way to really defend against these occurring. They’ve happened with Poloniex and Bitfinex, as well as other exchanges multiple times in the past. In essence, the best path is to only take short positions, knowing that they’re still going to be risky, and hope for the best. With a growing cryptocurrency population, ever more trades going on, much more liquidity coming to the markets as a whole, and parties that are interested in doing damage through DDoS attacks and the like, there are always going to be risks here. At the same time, however, those who are on the opposite end of the spectrum can also make out very, very well by taking advantage of the crashes, snagging some cheap coins to hold on to or sell once they bounce back!
As a side note to all of this, paying close attention to the prices of coins is important. Seeing a sharp downturn does not always mean that it is crashing – it could just be a false trend caused by one of the flash crashes, which often leads weak hands to start dumping due to fear. At the end of the day, it doesn’t really matter what’s causing the situation to kick off, as the simple fact is that the damage is mounting. And with a set of currencies that are as volatile as cryptos, this is a recipe for disaster.