Connect with us

Trading

BitMEX Liquidations: How to Avoid Getting Rekt

Published

on

BitMEX Liquidation

For those Bitcoin traders who like to trade with leverage (and lots of it) they will most likely end up at BitMEX.

This exchange based in Hong Kong is well known in the Bitcoin community for being one of the most efficient and sophisticated Bitcoin futures exchanges on the market. With leverage up to 100x your initial investment, traders relish the high-risk, high return nature of the exchange.

However, BitMEX is a profit maximising futures exchange. Although they give traders the opportunity to make large returns on positions, they have become incredibly efficient at mopping up loose change. This easy money is handed on a plate to them by new traders who make silly decisions.

In this post we will take you through one of these bad decisions that you can easily avoid and reduce your chance of becoming liquidated or, in crypto lingo, “Rekt”.

BitMEX 101

Before we can take a deep dive on the nature of BitMEX order types, we have to give you a quick overview of BitMEX.

BitMEX (Bitcoin Mercantile Exchange) is a futures exchange that operates out of Hong Kong. It was started in 2014 by a team of ex investment bankers and traders. It is perhaps best known for being the first exchange to offer leveraged derivative products on Bitcoin.

These futures on BitMEX are not the regulated type that you have read about on the CME or CBOE. These are futures contracts that are traded on the open order books on the BitMEX exchange. They are not regulated and can be traded by any retail cryptocurrency trader.

BitMEX has grown substantially since their early beginnings and have rode the crypto wave more skillfully than most other exchanges. In fact, they recently broke a record for total volume of more than 1m BTC in a 24-hour period.

It’s safe to say, BitMEX is successful.

How BitMEX Margin Works

When you are doing any sort of leveraged trading on exchanges, you are required to put up margin for your account. These are required to make sure that the exchange or broker is not left holding the bag should the position quickly move against you.

Initial margin is required in order to cover the position of your futures contract. This initial margin is determined according to the amount of leverage that you have decided to take on. For example, if you are using 1:100 leverage then your initial margin is going to be 1% of your position.

When you place a futures trade on BitMEX, you are actually trading what is called a “limited risk” futures contract. Your losses cannot exceed the value of your initial margin.

This asymmetric payoff profile is one of the reasons that BitMEX is often chosen by traders. It gives them all the upside and limited downside. In fact, the payoff looks almost exactly the same as the payoff of a financial option. Below is a simple illustration of how the payoff looks.

Payoff of BitMEX limited Risk futures

How does BitMEX allow you such a favourable position?

This is because of the way they determine the Maintenance Margin Requirement (MMR). With usual brokers in traditional finance, when you breach your maintenance margin requirement, you will get what is called a “margin call”. However, BitMEX has something much more efficient and that is their Liquidation engine.

This is basically an automated system that will immediately close out positions that have already moved against the trader and have started eating into the initial margin.

What is the catch?

The relationship between the MMR and the initial margin is not constant and will vary arbitrarily according to the amount of leverage that one is taking on.

Liquidation price vs. Bankruptcy Price

BitMEX uses two prices that will determine levels for initial margin and the MMR. Your bankruptcy price is the price at which your initial margin has been exhausted and your loss from the position is 100%.

The liquidation price is the price at which you have exhausted your MMR and it is the price at which your position will be closed. This is done in order to protect BitMEX from the adverse and potentially harmful moves in the price of Bitcoin. You can read more about BitMEX liquidations here.

When you are placing an order, you will see your liquidation price as it presented in the order form. There is, however, no bankruptcy price being show to you upfront. This means that you can’t see how far the bankruptcy price is from the liquidation price and hence how much room your trade has to move from your complete initial margin.

Order forms with liquidation on Bitmex. Left with 100x leverage, Right with 1x. Image source: Bitmex.

By not showing you the difference between your bankruptcy price and the liquidation price, BitMEX is hiding away a secret edge that they have when it comes to high leverage contracts. That edge is the amount by which BitMEX will allow the trade to eat into the initial margin before they liquidate it.

This may sound like a bit of a mouthful right now but it helps to take a look at some examples as well as some actual numbers.

Statistical Edge

When your position is getting closed at a liquidation price that is further away from the bankruptcy price, you are being denied extra price participation and the chance for a market recovery. You are giving BitMEX the statistical edge in the long run even though a large proportion of your initial margin was not used.

It helps to take a look at some numbers in order to contextualize this. Below are the calculations for the bankruptcy price, liquidation price and the resulting margin rates. This is live data and you can monitor it yourself with this handy tool.

Liquidation and Margin Calculations on BitMEX. Image source: BambouClub.

What this shows is the amount of theoretical MMR you will have on a BitMEX long futures trade and how large this number is compared to the initial margin. This is all calculated by using the liquidation price given by BitMEX and the bankruptcy price which is calculated separately (based on the leverage).

From these two numbers, one is able to get an idea of the initial margin as well as the MMR that is being applied to that trade. As you can see in the second last column, the MMR is larger as you take on more leverage (as would be expected).

However, what is really interesting is viewing this relative to the initial margin. This is the last column in the sheet and this shows that for larger leveraged trades, the MMR makes up an increasingly greater percentage of the initial margin.

In the case of the 100x leverage trade, the position would have to move only $35 away from current prices and it will be liquidated. Hence, even though you have put up $70 in initial margin (price move from spot to bankruptcy), you will be liquidated when the price has only being moved to half of that ($35 MMR).

When you take a look at the numbers for the 10x leverage, the effect is way less pronounced. Your initial margin is $639 and you won’t get liquidated until the price has moved $609 away from the spot level. Hence, you are allowed to participate in a change in price that is almost 95% of your initial margin.

Put another way, the MMR of 10x leverage position is only 4.58% of the initial margin. This is more than 10 times below the 50% of initial margin MMR that is required for a 100x leveraged trade.

So, from a purely statistical perspective, the 100x or 50x leverage trade is not the most efficient trade to make and can in the long run give BitMEX the edge.

Lower Leverage, Less Liquidation (LLLL)

BitMEX is a well-oiled machine and they are very efficient at closing out the riskiest trades. Their risk management protocol comes at the expense of your long-term trading profits.

This is nothing against BitMEX and they are doing exactly what any high leveraged trading operation is doing. They have to make sure that they always have enough funds to cover losing trades.

In fact, BitMEX even has a reserve fund that is used as insurance on those occasions when they cannot stop losing positions fast enough. This insurance fund currently has a balance of 12,336 XBT.

However, if you want to avoid funding the BitMEX insurance fund, don’t trade at 50x or 100x leverage.

The 4 “Ls” will save you in the long run. Lower Leverage -> Less Liquidation

Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

Rate this post:

Important for improving the service. Please add a comment in the comment field below explaining what you rated and why you gave it that rate. Failed Trade Recommendations should not be rated as that is considered a failure either way.
1 vote, average: 5.00 out of 51 vote, average: 5.00 out of 51 vote, average: 5.00 out of 51 vote, average: 5.00 out of 51 vote, average: 5.00 out of 5 (1 votes, average: 5.00 out of 5)
You need to be a registered member to rate this.
Loading...

5 stars on average, based on 10 rated postsNic is an ex Investment Banker and current crypto enthusiast. When he is not sitting behind six screens trading Bitcoin, he is maintaining his numerous mining rigs. Twitter: @nicrypto




Feedback or Requests?

Altcoins

Will Ethereum Continue Rally Ahead Of Constantinople Hard Fork?

Published

on

“Clear eyes, full hearts, can’t lose.”  One of my favorite quotes from “Friday Night Lights” is a great way to describe the new year.  2018 was rough, brutal, and painful.  But with a new year comes new opportunities.  Crypto markets have started off strong during the first week of January.  Bitcoin gained nearly 5% on Sunday and now trades at approximately $4,060.  The broader crypto market has also followed suit as several notable coins have generated substantial gains.  Those coins include:

  • Ripple (XRP) with a 3% gain
  • Litecoin (LTC) with a 10% gain
  • Stellar (XLM) with a 5% gain
  • Ethereum (ETH) with a 2% gain

While the gains are a great way to bring in the new year, the market is still very cautious regarding the next step.  For cryptocurrencies to truly break out of the current bear market, they likely need to reach a market valuation of $230 billion.  Bitcoin would also need to trade at approximately $6,000.  So, based on today’s levels, there is still substantial work left to do.

Ethereum Hard Fork

Binance has just announced plans to support the Ethereum Constantinople Hard Fork which is currently scheduled for January 16th.  Traders need to be reminded that January 16 is the expectation, but nothing is set in stone.  When asked about the firmness of the data, Peter Szilagyi, an Ethereum core developer had this to say: “We can just mid-January, it doesn’t make a difference if we decide on a date or not.  We can always postpone.”

Ethereum has already had to delay the Constantinople upgrade once before after developers detected some errors on the testnet platform.  Given the complexity of the upgrade, it wouldn’t be a surprise if an additional delay was necessary.

Is the Hard Fork Necessary?

In a word, yes.  There are a few issues at play here.  The first is the “difficulty bomb.”  The difficulty bomb is the term used to indicate the increasing level of mining difficulty that results in an increased amount of time required to mine a new block on the Ethereum blockchain.  Block times are expected to begin increasing this month and could hit 30-second block times by May.

Some traders may be wondering why this “bomb” was put in place.  It’s a bit complex but essentially was designed as a deterrent for miners, who may opt to continue with Proof of Work (miners compete directly against each other), even as the blockchain transitions to Proof of Stake (where rewards are based on staking).  With the bomb in place, Ethereum will need to undergo regular network upgrades.

The Constantinople Upgrade

Constantinople is a system-wide upgrade that was enacted at the end of August, 2018.  The upgrade includes five different Ethereum improvement proposals (EIPs).  After the proposals are released on Ethereum, the blockchain will be permanently altered with new backwards-incompatible upgrades.

This essentially means that the network of computers that run Ethereum software must either update or continue running independently.

There is no doubt that hard forks have caused a great deal of squabbles in the past.  The most notable of which occurred with the Bitcoin Cash (BCH) hard fork.  Roger Ver, known as “Bitcoin Jesus” and the most prominent supporter of Bitcoin ABC, took a position in favor of the new software upgrade.  On the opposite side, Craig Wright, who claims to be Satoshi Nakamoto, was in favor of expanding the maximum block size from 32MB to 128MB.  ABC appears to have won that war.

Ethereum Rally Can Continue

Ethereum has had a monster rally over the past 30 days, gaining more than 80%.

So, while Ethereum miners are likely quite anxious as we approach the hard fork, the broader market appears to be quite fond of it.  I expect the rally to continue as we approach January 16th.

One risk is that if developers announce another delay.  A short delay probably wouldn’t have a major impact on price, but a delay of any meaningful length could lead to a selloff.  Traders looking to initiate a short-term trade may want to make use of stop limit trades.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

Rate this post:

Important for improving the service. Please add a comment in the comment field below explaining what you rated and why you gave it that rate. Failed Trade Recommendations should not be rated as that is considered a failure either way.
1 vote, average: 5.00 out of 51 vote, average: 5.00 out of 51 vote, average: 5.00 out of 51 vote, average: 5.00 out of 51 vote, average: 5.00 out of 5 (1 votes, average: 5.00 out of 5)
You need to be a registered member to rate this.
Loading...

4.8 stars on average, based on 21 rated posts




Feedback or Requests?

Continue Reading

Altcoins

Encrypgen (DNA) Surges 50% On Heavy Volume

Published

on

As the new year begins, crypto traders are certainly filled with hope that 2019 will be more bullish than last year.  There was an article I read a few days ago that laid out some really strong reasons why traders should be optimistic about cryptocurrency in 2019.  The logic is sound.  And while diversified crypto portfolios are always the best bet, traders may want to make Encrypgen (DNA) a large part of their portfolios.  I expect DNA to be one of 2019’s top performing tokens.

Strong Trading Session

During the past six months, I’ve written extensively on Encrypgen as I feel the company has significant potential.  And now, with the new year upon us, it appears that other traders are finally catching on.  DNA exploded nearly 50% on one of its largest volume days in recent history.  The coin has since re-traced but is still up approximately 30% (as of this writing).

This is especially significant because of the large sell wall that had been in place for weeks.  One large token holder needed to exit the position for personal reasons.  And those tokens are now held in strong hands who believe in the project.  Now that the sell wall has broken, DNA hodlers can expect significant growth, both in the business and in the token price.

Encrypgen Team Focused On Business Growth

While not true for many crypto projects, Encrypgen has been focused on the core business regardless of the token price.   In December, Encrypgen announced a partnership with Murrieta Genomics.  This has the potential to be an invaluable partnership as Encrypgen continues to see increasing genomic data sets uploaded to the Gene-Chain.

In addition to working on getting consumers to upload their genomic data sets, Encrypgen is also getting researchers to sign-on to the platform.  For a true marketplace to occur, it is of course necessary to have both buyers and sellers.  On the Gene-Chain, consumers are the sellers and researchers are the buyers.  Researchers will use DNA tokens to purchase data direct from consumers.  This volume is what will end up driving the DNA token price.  The vision is for Encrypgen to become the Amazon.com of genomic data.

Future Developments in 2019

As the company continues to progress, token holders can expect significant developments throughout the rest of the year.  Some of these expected developments include:

  • Additional Partnerships
  • Venture Capital Funding
  • Genomic Data Set Growth
  • New Exchange Listings

There is no doubt that cryptocurrency can be a momentum game at times.  And now with the recent surge in DNA trading, Encrypgen appears to have significant momentum.  The question will be if the company can maintain it.

DNA token hodlers can expect to see a barrage of news coming out in the next few weeks and beyond.  Many of these announcements will center around additional partnerships that will help drive the company’s core business.  In addition to that, the company is securing additional funding from a venture capital deal.  If a VC deal is completed, it could have a significant impact on the token price.  As the business progresses, it will also be important to keep an eye out for signs of growth in the number of genomic data sets that consumers have uploaded to the Gene-Chain.  The more sets that are available, the more transactions that will occur between consumers and researchers.

Lastly, but probably least importantly, will be news regarding new exchanges.  Encrypgen maintains its position that it will not pay bribes to have its token listed on exchanges.  And that is certainly the right decision.  But, hopefully, legitimate large exchanges like Bittrex will see the potential that the DNA token has and list it.  If that happens, it would be a boon for the DNA token price.

Conclusion

Encrypgen remains the top position in my portfolio.  Although 2018 was a rough year, I certainly expect that to turn around during the next 12 months.  And while I expect many altcoins to participate in a crypto rally, I fully expect DNA to be a top performer.

Disclosure:  Chris has a long position in DNA

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

Rate this post:

Important for improving the service. Please add a comment in the comment field below explaining what you rated and why you gave it that rate. Failed Trade Recommendations should not be rated as that is considered a failure either way.
3 votes, average: 5.00 out of 53 votes, average: 5.00 out of 53 votes, average: 5.00 out of 53 votes, average: 5.00 out of 53 votes, average: 5.00 out of 5 (3 votes, average: 5.00 out of 5)
You need to be a registered member to rate this.
Loading...

4.8 stars on average, based on 21 rated posts




Feedback or Requests?

Continue Reading

Bitcoin

Mainstream Adoption of Bitcoin Will Send Price Soaring

Published

on

The pain inflicted by the crypto markets has been extreme this year.  It’s become clear that the market ran way too high, way too fast in 2017.  Many traders knew a severe correction was forthcoming, but I doubt many predicted the correction (now a full-fledged bear market) would be this extreme.  While the markets have been painful, Bitcoin (BTC) serves a bigger purpose than just making money in the markets.  To some, that purpose is a worldwide digital currency that can eventually be used to purchase anything.  To others, the purpose is a store of value to prevent against the inflation that plagues FIAT currencies.  Either way, it’s important to remember that this is just the beginning.

Early Phase of Adoption

Bitcoin is still in the very, very early phase of adoption.  Let’s look at the graph below.

The technology adoption life cycle is a sociological model that describes the adoption or acceptance of a new product or innovation, according to the demographic and psychological characteristics of defined adopter groups.

Many consumers still have no idea what Bitcoin is.  When people google the term Bitcoin, they are likely to get the following definition:  Bitcoin is a digital currency that is not backed by any country’s central bank or government.  Bitcoins can be traded for goods or services with select vendors.  But the truth is that Bitcoin can’t be used to buy things that would be useful for most people.   Consumers can’t use Bitcoin to buy groceries, pay the cable bill, pay for medical expenses, buy a car, or purchase a home.  For years, Expedia (one of the world’s largest travel booking engines) allowed consumers to use Bitcoin to make hotel reservations.  But even that was taken away in June.

Clearly, Bitcoin has yet to achieve its intended goal.  Based on the graph above, I can confidently claim that Bitcoin is still in the innovators phase.  In fact, one big innovation in the future may help push Bitcoin into the early adoption phase.

Lightning Network

Although Bitcoin took the world by storm in 2017, one big problem has always loomed large; scalability.  The ability to scale to the required size was a concern when Bitcoin was first introduced to the world and it remains a problem that needs to be addressed.  What does scalability entail?  Well, let’s look at the visual below.

At present, Bitcoin is only capable of processing approximately 7 transactions per second.  Compared to PayPal, Ripple, and especially Visa, Bitcoin needs to improve dramatically.  One way that Bitcoin may be able to perform significantly better is through the lightning network.

It’s currently estimated that the lightning network will have the potential to process 1 million transactions per second.  While that sounds great on paper, it’s still just theoretical.  Once the network becomes operational, its true greatness will be determined.

Conclusion

Although Bitcoin has had a rough 2018, it’s important to recognize that the future still burns bright.  Bitcoin is still in the innovators phase of adoption.  And while the lightning network is set to address Bitcoin’s biggest hurdle, better days are ahead.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

Rate this post:

Important for improving the service. Please add a comment in the comment field below explaining what you rated and why you gave it that rate. Failed Trade Recommendations should not be rated as that is considered a failure either way.
3 votes, average: 4.67 out of 53 votes, average: 4.67 out of 53 votes, average: 4.67 out of 53 votes, average: 4.67 out of 53 votes, average: 4.67 out of 5 (3 votes, average: 4.67 out of 5)
You need to be a registered member to rate this.
Loading...

4.8 stars on average, based on 21 rated posts




Feedback or Requests?

Continue Reading

Recent Posts

A part of CCN

Hacked.com is Neutral and Unbiased

Hacked.com and its team members have pledged to reject any form of advertisement or sponsorships from 3rd parties. We will always be neutral and we strive towards a fully unbiased view on all topics. Whenever an author has a conflicting interest, that should be clearly stated in the post itself with a disclaimer. If you suspect that one of our team members are biased, please notify me immediately at jonas.borchgrevink(at)hacked.com.

Trending