Security risks of crypto derivatives
Low liquidity: It is reported that a sell-order with the size of 3,645 BTC could have caused the price drop of 1.000$ on 17th May 2019 – source. With the current state of the market, players using derivatives can profit large from selling Bitcoin. On some derivative exchanges like Bitmex, it’s possible to use 100x leverage.
This means that you can trade with the size of 100 Bitcoin, while owning just one. Larger players could use those derivatives to bet on the price decline of Bitcoin and then initiate the decline themselves, as demonstrated with the report mentioned. The disadvantaged smaller players face the risk of an illiquid market.
Exchange hacks: With fewer regulation often comes no protection of user funds. In the past, lots of exchanges have been hacked and funds were stolen. Here you can see a list of hacked exchanges, sorted by year and date. While there are fewer derivative exchanges and therefor less security issues versus usual crypto exchanges, it’s naive to think that issues won’t happen with more derivative exchanges launching.
Asset risk: As the name of derivatives comes from deriving the price of the underlying asset, the asset itself is a security risk to the derivative. If an actor finds a way to maliciously create endless units of a cryptocurrency, the cryptocurrency and the derivative may face large price declines within seconds.
Malware: Since the rise of cryptocurrencies in 2016-2017, malicious software like wallet stealer or clipboard replacer got popular. Those are a big risk to the use of crypto derivatives, as all of your money could be gone by the malware replacing your derivative exchange wallet address with a fraudulent one. To best prevent this risk, you have to be cautious and use a good antivirus software.
Fraud: The risk also can come from pure fraudulent activity by the exchange itself. In the case of the crypto exchange QuadrigaCX, a ponzi scheme fraud. The owner spent, traded and used assets the clients deposited at QuadrigaCX, according to the OSC (Ontario Securities Commission) – source.Continue reading