BitMex Reported on insurance Fund and how it performed on 12 and 13 March
Last few weeks, March 12,13 Bitmex has grabbed a number of questions and queries from our traders related to the role and performance of Bitmex Insurance Funds. here, Bitmex cleared the concept related to working of funds and its utilization, they responded to questions relating to the calculation of size for funds and its flexibility, reported on 23 March 2020.
Working on the Insurance Fund?
working of the Insurance Fund needs to be illustrated, by March 12 ,13 the traditional and cryptocurrency markets brought unmatched volatility. In response to these the Fund worked as the last option for defense, attempting to prevent Auto Deleveraging (ADL). ADL refers to automatic deleveraging of the positions of profitable traders (ranked by profit and leverage in that contract) against liquidated positions to prevent bankruptcy.
Unlike the traditional exchange, which makes traders to lose more than the margin posted in their account. These occurrence leads the exchange to bear up losses owed, with the clearing the house and its members taking all the credit risk. the example from Europe, 2018 showing what can go wrong with this.
Dissimilarity, on BitMEX, losing traders are never owe more than margin posted. The assurance provided by Insurance Fund restricts the drawback of losing traders and restricts the upside. traders are likely to get expected profits.
Ignored Work
It is not up to the mark to cover BitMEX running costs neither contribute to BitMEX profits.
The traders with negative account balances are not demanded for payment
Not used to influence markets.
The Insurance Fund remains the last option to get tackled with ADL On 12 and 13 March, despite the extreme market situation, ADL was successfully prevented.
Chart below states a normal trade resulting in a profit or loss.In order to get quick access we will follow the loss, starting with the Bankruptcy Price.
Terms
There are two terms Bankrupt price and Liquidation price, it is quietly very important to get and recognize the following points
Bankruptcy Price
Bankruptcy price is the price whose position has zero equity left (all posted margin has been depleted)
Liquidation Price
The Liquidation price is price whose position has a small amount of equity left (only Maintenance Margin remains). At this point, the Liquidation Engine will take over the position
Trading at 100x long on XBTUSD:
Entry Price Liquidation Price Bankruptcy Price
6,000 5,970 5,940
Bankruptcy Price
Trader places the order, carry on trading and posts margin against their positions and can reallocate their margin. As per allocated margin, each position accompanies a calculated Bankruptcy Price, the price at which the unrealised loss on a position (calculated using the Mark Price) is equal to all of the margin posted.
If a trader purchase the XBTUSD for 6,000 using 100x leverage, the Initial Margin required is 1% of the aggregate value if the price falls by 1% to 5,940 the traders position bankrupt This is the Bankruptcy Price.
For the traders’ initiative profits and to get position secured the, exchange must be in solvent position. For these, the position needs to be closed or in better than the Bankruptcy Price. However, the fluctuating market conditions, lead to execution at a favourable price cannot be guaranteed applicable for the smallest position also as there may not be appropriate offers matching the price and size required.
In the above stated example, take a view that the position was closed to 5,900. As per traders post, This would result in loss which is more than the margin. In traditional markets, the exchange would gain out more money from the participant and get a credit risk against them if they fail to pay.
Liquidation Price
Inorder to get rid of losses, that traders receive from getting closed to bankruptcy the trader’s post Maintenance Margin (which is included in the margin allocation). The Liquidation Price is the price in which difference between the unrealised loss and the margin posted is equal to the Maintenance Margin.
The trader who purchase XBTUSD for 6,000 (with a Bankruptcy Price of 5,940), the Maintenance Margin required is 0.50%. If the price fall to 5,970, the remaining margin would be equal to the Maintenance Margin.
If the marked price breaks the Liquidation Price, the trader’s are in liquidated position and their Maintenance Margin is uplifted by BitMEX’s Liquidation Engine.
Liquidation Engine
The Liquidation Engine there by prevents liquidation, these will be in force by reducing the Maintenance Margin requirement with cancellation of orders before any occurrence of liquidation. These inturn reduces the risk of the traders
The gross positions acquired from liquidations can only be reduced by the traders executed by Liquidation Engine.
In order to save the fund size, trades should decline the aggregated liquidated position at the appropriate price.
The unrealised loss should not be greater than the balance made available for that contract from the Insurance Fund
The Liquidation Engine is not able to satisfy all of trading criteria involved in decline conditions, which inturn results negative, but it can get perform in boom conditions to offset it.
In order to prevent the presence of ADL, the Balanced Insurance Fund is quietly important as the larger the balance, the additional Bankruptcy Price for the Liquidation Engine will be from the price at which it gets its positions. Larger the fund lesser the presence of ADL.
Recently, Bitfinex removed 87 trading pairs from its exchange platform
