Everyone knows that insurance in itself isn’t a fun topic to start with. On top of that, add a cryptocurrency platform to it doesn’t really sound that relaxing. But that’s why we are here to make it easier and tone it down for you. In this article, we are going to talk about all things related to the BitMEX insurance fund. We will discuss what it is and try to figure out the extent of its domain.
Also, we go into details regarding its workings and whether the BitMEX insurance fund is really needed or not.
Before anything else, let’s have a quick glance at the BitMEX trading platform.
- For anyone who’s planning to start a venture on BitMEX, the process may seem to be a little tedious. It is due to the old and outdated interface of the platform.
- As a trading platform for cryptos, BitMEX for sure already has a respectable position in the market. It provides a contract trading platform for crypto traders.
- For security reasons, one surely cannot start trading until and unless traders finish the BitMEX verification process.
- Traders can avail services such as futures trading, dynamic contracts, or leverage trading on the fund.
- The platform makes use of the KDB+ software as its trading engine. It is the same software that many large banks employ to keep their platforms safe and secure.
- Traders in the US cannot make use of BitMEX. But they can trade by making use of a VPN.
- Also, it provides the BitMEX affiliate program and has a diverse system to support the traders. It is to safeguard the interests of both the platform and the traders.
What is BitMEX Insurance Fund?
The fund is a pool of resources that deals with unfilled liquidation orders. It carries that out by allowing instant exchange settlements with regards to these orders. For customers with a negative trade balance, there is no requirement to pay up upfront. That is, these traders can still hold onto it once they liquidate their leveraged trade.
What it means is that the platform uses the fund to reward the winning trader. It does that by using the resources from the fund to pay for the profits. At the same time, it puts the money back into the fund once the losing trader pays up. Besides, even if that doesn’t happen sometimes, BitMEX would’ve already fulfilled its role.
BitMEX makes use of its insurance funds in a lot of ways. Firstly, to gather funds, it makes use of auto-deleveraging or ADL (we explain ADL in detail in the article). In short, ADL provides BitMEX with a cleaner exit from the market. Also, it helps prevent high volatility and prevents BitMEX from extensive socialized losses.
Besides, the inability of the funds to occupy positions triggers ADL. Also, it occurs during the process of liquidation.
Trends in BitMEX Insurance Fund
- Till now, the fund has not been through what you would call a large drawdown. Only one incident comes to mind that was back in 2018. It was when it lost Bitcoins worth around $5.1 million.
- But when you look at the opposite side, in the same year, it regained a pool of Bitcoins. It was worth a total of $22.2 million.
- The resource pool is around 26,388 BTC rich. In percentage terms, out of all of BTC circulating in the market, it holds 0.15% of it. That amounts to more than a staggering $200 million in the fund.
- The success of the BitMEX insurance is evident from the fact that for 26 months, it saw positive growth consecutively.
- The process of drawdown still remains quite opaque. The reason is the absence of a mechanism for transparent analysis of how fund breakdowns happen per contract.
BitMEX Insurance Fund Explained
In this segment, we will be going to discuss what the fund really does. Also, we will also cover what it doesn’t do.
Mechanism of the BitMEX Insurance Fund
For starters, it is vital to understand how the fund works now that the market is pretty stable. It stops the process of Auto Deleveraging from taking place. In that way, the fund is the final wall of defense of the platform. The process of Auto Deleveraging is famously known by the term ADL.
In short, ADL prevents a platform from going bankrupt. It mainly does that by deleveraging positions that are running profits. And then it puts these positions in opposition to liquidated positions. Positions are profitable according to the leverage and profit rankings across various contracts.
BitMEX insurance fund has the edge over traditional methods of insurance. That is because the trader’s account might lose out on funds that exceed the margin. So, if traders are on the losing side, the clearinghouse and the traders bear the credit risk. Also, the exchange gathers the losing money owed by these traders.
On the other hand, traders don’t have to worry about such situations when it comes to the fund. Traders will never need to pay more than the margin of the account. Thus, it is a big assurance from the side of the fund for the traders who might lose out. At the same time, it also assures the profitable traders by making sure they receive their due profits.
The Limitations of BitMEX Insurance Fund
- For the traders who are making use of the fund, it doesn’t add to their profits or take into account the running costs.
- There is no way to use these funds to manipulate external markets.
- Traders with negative balances need not make payments to the funds.
Auto-deleveraging of the Insurance Fund
If the insurance fund runs out, beneficiaries cannot be certain that they will receive the full benefit they deserve. Rather, they must contribute to offset the expenses for those who lost. On BitMEX, this is auto-deleveraging or ADL.
After March 2017, ADL has not appeared on the BitMEX perpetual contract. The SEC denied the Winklevoss application for the COIN Bitcoin ETF in early March 2017. The stock market fell 30% in five minutes on that day. The BitMEX insurance fund was completely exhausted as a result of the severe price decline. Many XBTUSD shorts had their income reduced due to ADL.
The BitMEX insurance fund developed greatly ever since. But despite this, crypto-currency trade is still a risky and unpredictable business. At present, there is an ongoing healthy period of relatively higher leverage. But there are chances that rapid price changes in Bitcoin are possible in the future. Also, on the BitMEX Bitcoin permanent contract, there is no guarantee that ADLs will not occur again.
BitMEX Insurance Fund Chart
The insurance fund’s absolute value rose a couple of times over the past few years. But the growth is less evident when measured against other BitMEX trading platform metrics. Such as open interest, as seen in the graph below.
BitMEX’s Insurance Fund came up to serve as the last defense line against ADL. Due to extreme market movement in the past, the platform was able to avoid ADL totally. The chart depicts a typical transaction that results in a profit or loss. For this segment, we will start with the Bankruptcy Price and work our way through it. Thus, it is how BitMEX Insurance Fund addresses the issue of ADL.
It’s critical to know these financial terms:
- In simple terms, the value in which a position does not have more capital is the Bankruptcy Price.
- The value in which a position with a limited amount of capital remains is the Liquidation Price. When liquidation occurs, the Liquidation Engine should assume the position.
Bankruptcy Price of the Insurance Fund
Every position has a determined Bankruptcy Price depending on the assigned margin. Suppose a trader puts in an order for his/her trade. And proceeds to post margin against his or her positions and reallocates his or her margin. A position’s unrealized loss equals the entire margin posted at this price.
For example, a trader purchases 6000 worth of Bitcoin and uses 100 times the leverage. The Initial Margin required is 1% of the overall investment. If the price drops 1%, the amount will go down to 5940. And the trader’s position would be bankrupt.
For the traders’ positions and profits to be safe, an exchange must stay profitable. Thus, it is important for the position to close down at or above the Bankruptcy Price. Even so, trades at a reasonable rate are not a surety, even for the smallest position. The reason is shifting market conditions as there might not be an offer/bid that matches the anticipated cost and size.
Let’s say the position closes at 5900 in the case mentioned above. In that case, it will result in a loss greater than the margin posted by the trader. Thus, it may give rise to Bitmex insurance fund abuse.
In contrast, in a more traditional exchange, the trading platform could simply ask the trader for more funds. The trading platform will then label the trader at a credit risk if they cannot pay. Visit our BitMEX leverage trading guide for further information about margin trading.
Liquidation Price of the Insurance Fund
The trader should place a Maintenance Margin to cover the losses that will result from shutting down at the Bankruptcy Price. The Maintenance Margin is equal to the difference between the unrealized loss and the posted margin at the Liquidation Price. Also, BitMEX Insurance Fund Bitcoin addresses the limitations of using Bitcoins for leverage up to 100 times.
Maintenance Margin needed 0.50% for a trader that purchases 6,000 worth of XBTUSD. The leftover margin would be equivalent to the Maintenance Margin unless the price dropped to 5,970.
The trader’s position liquidates when the “Mark Price” falls below the “Liquidation Price.” And BitMEX’s Liquidation Engine handles the Maintenance Margin.
Besides, traders must keep one thing in mind. That is, when it comes to long positions, the fund covers the gap. But it happens when the bankruptcy price is above the liquidation price.
BitMEX’s Insurance Fund: Liquidation Engine
The Liquidation Engine tries to stop liquidation from occurring. It does so by removing orders ahead of time. And this way, it lowers the required Maintenance Margin and avoids liquidation. This can also lead to traders lowering their Risk Limit for a larger position. This is also called partial liquidation. Through the insurance fund margin, BitMEX sums up the liquidated positions. And it caters to the Liquidated Engine to trade based on five rules.
- The Liquidation Engine will conduct trades that will lower the gross positions gained from liquidations.
- Trades should pull down the average number of liquidated positions. Not only will this result in the positions priced at the best value. But it will also maintain the fund size.
- The unrealized loss must not exceed the amount provided by the insurance fund for the given contract.
- Trades can abandon the average number of liquidated positions rapidly. The reason is to lower the risk of adverse market changes when withdrawing the position.
- Trades should try to have as little effect on the market as possible.
Every trader needs to meet these conditions. But to meet these conditions, there are many factors that traders need to consider. The working of these factors is heavily reliant on other traders’ performance.
For any trading activity related to leveraging purposes, BitMEX is among the top platforms of 2023. It employs Bitcoins for the purposes of carrying out trading, and its perpetual contracts exchanges are famous. The BitMEX insurance fund provides heavy security to your assets. Also, fees for the exchanges on the BitMEX platform are competitive, ensuring profits to traders. BitMEX is for those who are seeking high leverage for services of margin trading.
Also, for now, traders in the US cannot directly make use of the benefits of the insurance fund. The USA is a huge market for cryptos in general. Thus, the absence of the market is a big loss for both traders and the platform. But, traders may still employ VPN services to enjoy what BitMEX’s insurance fund has to offer.