In this article we will discuss bitcoin margin trading platforms, and their features, and pros and cons.
If trading is a business, margin trading is like a business loan or credit with risks and interest payments.
Usually, cryptocurrency trading markets are made up of two components: Spot Exchange and Margin Trading. While the former is a direct purchase of a transferable asset, the latter is an exchange specific leveraged (margin) trade that requires settlement between the lender and borrower.
Margin trading is usually carried out on derivatives of Bitcoin or cryptocurrency – Futures, Options or Swaps. A derivative is a financial contract whose value is dependent on the value of an underlying asset. An option can be bought on the futures, hence, the underlying physical asset in that case in the futures contract.
Moreover, the price of the contract can vary larger or smaller than the asset depending on it’s specifications (premium).
‘Futures‘ is a contract that is a standardized, exchange trade-able contract between two parties to trade a specified asset for a set price, on a set date in the future. CME, BitMEX, Bakkt, LedgerX are some of the regulated platforms that offer monthly or bi-weekly or weekly or even daily futures.
An option is similar to a futures contract, however, it is a right not an obligation to buy or sell a specified asset on a future date.
Understanding Crypto Derivatives – Perpetual Swaps
Specifically for crypto markets, there is a special contract first developed by BitMEX – Perpetual Swaps. ‘Perpetual swaps’ which are similar to futures with two primary differences,
- There is no expiry or scheduled settlement of contracts, it depends on the margin and the will of the trader.
- The price of futures is different from the swaps which are generally executed at market price.
Now since perpetual swaps are never ever really settled, the price of the long buyers and short sellers are balanced by something called as Premium and Funding Rate. The funding rate is settled periodically between the long and short holders of the contract. Then the contracts are rolled over to the next time period, the rate varies to keep the price of Perpetual swap close to the index price.
When the market is bullish, the Longs will tend to pay Shorts. When the market is bearish, the Shorts will tend to pay Longs.
The margin placed in the accounts is used to pay for the funding rate and the loss/profit on the order are accounted as well. If the margin falls below the liquidation price of the index, the exchange closes the contract arbitrarily.
The insurance fund of an exchange are built to guarantee profits and avoid deleveraging in event of unfilled liquidations. The liquidation engine of exchange takes over liquidated order from users and carries out opposing trades to profit from it. The actual order is liquidated at bankruptcy price.
BitMEX is one of the leading exchange and derivatives platforms in the crypto market. It is owned and operated by HDR Global Trading Limited, and registered in Seychelles.
The trading platform was founded by Arthur Hayes, Ben Delo, and Samuel Reed with support from private funding.
Soon the exchange owners turned into billionaires from the growth of their exchange and cryptocurrency portfolios. Not only that, Ben Delo is the UK’s youngest self-made billionaire who made this fortune from Bitcoin and the exchange.
All margin on BitMEX is denominated in Bitcoin, allowing traders to speculate on the future value of its products only using Bitcoin. At press time, the value of the insurance fund at BitMEX is 35,282 BTC.
- The liquidity and volume on the exchange is massive
- The perpetual contracts and funding rate were invented by BitMEX itself.
- Due to the high leverage, the liquidation engine on BitMEX often runs into market slippage. This causes wicks of disproportionate sizes in the price of the cryptocurrency.
- It offers a limited number of cryptocurrencies from Margin Trading, Bitcoin, Ethereum and XRP only.
Binance was founded by Changpeng Zhao and Yi He on 14th July 2017. Since then it has grown to become the largest spot cryptocurrency exchange in the world in terms of trading volume.
Zhao serves as the CEO of Binance, while Yi He, who is also the co-founder of Okex exchange, currently, serves as Binance’s CMO. The exchange led the spot volume in late 2017 and 2018. However, it wasn’t until late 2019 that Binance enabled margin trading on it’s platform.
Nevertheless, it has picked up a lot of pace since it’s start and currently facilitates margin trading for 24 cryptocurrency pairs. The margin on Binance is denominated in USDT, hence, traders can speculate using the stablecoin. The total insurance fund at Binance for BTCUSD contracts is currently 12.53 million – nearly 1,392 BTC.
- Offers perpetual contracts for a large number of cryptocurrencies.
- Since it is the largest cryptocurrency exchange as well, a variety of cryptocurrencies can be used for lending and creating margin on the exchange.
- It offers a Secure Asset Fund for Users (SAFU) which aims to reimburse users in case of hacks, glitches and technical errors on the exchange.
- Like most derivatives exchanges, the high leverage offered on Binance for altcoins can be too risky for most traders.
Deribit is an exclusive Derivatives only Exchange for cryptocurrencies. Founded in 2016, the platform focuses on options, futures and swaps only. Deribit database centers OVH datacenter SBG in Strasbourg (France) due to be shifted to Slough, UK since January 2020.
Deribit Exchange primarily facilitates Bitcoin options and futures contracts only with upto 100x leverage. Apart for these, it also offers Ethereum perpetual contracts with comparatively smaller leverage.
It is one of the few exchanges to offer options contracts along with Okex, FTX, CME and LedgerX. BitMEX is also planning to avail trading of options on its platform.
Similar to Deribit, Bybit is a derivatives only exchange as well. It is registered in the British Virgin Islands and has it’s headquarters in Singapore.
It guarantees protection against system error or promises to pay full amount of losses caused due to them. It currently supports perpetual contracts of only four cryptocurrencies: Bitcoin, Ethereum, XRP and EOS. The insurance fund at ByBit for Bitcoin contracts is 1225 BTC.
The fee for Bybit, Deribit and BitMEX is the same. It’s -0.025% for Make and 0.075% for Taker.
Deribit and Bybit are two exchanges that markedly offer better pricing models than BitMEX to avoid slippage in the markets.
BitMEX – XRP Slippage Incident
Recently, the price of XRP perpetual contracts on BitMEX dropped by more than 60% due to market slippage. According to a report by BitMEX, the situation is unavoidable and can happen to anyone.
As the price continued down due to slippage, the traders who triggered stop during the time at market orders added to the long squeeze causing a huge drop.
The incident was unfazed at most other exchanges, while a selling pressure was evident across exchange, the magnitude of the slippage was only at BitMEX.
BitMEX responded via a tweet,
However, other leading exchanges like Deribit, Bybit, FTX and Binance claim to offer better pricing technique than BitMEX to avoid abnormal situations like these.
Margin trading is a very risky business. Moreover, by adding 10-100x leverage on it, trading crypto derivatives is a rocket journey with no parachute on-board. News of liquidations go rampant during high volatile movements in the market.
Nevertheless, the greater the risk, the greater is the reward. There are various auto-mated trading systems, and trading experts who aim to win big and lose small. Careful risk management and trading strategies can avoid extreme losses in Bitcoin and altcoin market alike.
Currently, in this open market respect, Binance is leading as it offers margin trading for more cryptocurrencies than most other exchanges in the market.
This not only provides an opportunity to leverage one’s trade, but also to short these altcoins. Giving an opportunity for traders to put their money where their analyses point. It also helps in the growth of the liquidity of the cryptocurrency markets.
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