What is BitMEX insurance fund?
BitMEX insurance fund is a feature not so common among trading platforms, and these kinds of functions make a difference between market leader and those not so successful.
Despite the fact that cryptocurrencies still have a relatively juvenile market, since the large breakout of 2017, some leaders have been established among crypto trading platforms. These are institutions that have successfully managed to overcome baby steps and offer their clients something more than usual.
One such platform is BitMEX. So, let’s dive into explaining their insurance fund and how it functions.
What is BitMEX?
The official website simply states that “BitMEX is a trading platform that offers investors access to the global financial markets using only Bitcoin,” and this is a thing that differentiates BitMEX from other trading platforms. However, it is not the only one.
BitMex offers its users a variety of other options which others do not.
From perpetual, leveraged swap contracts, across a variety of leverage options and many different kinds of trading contracts, to UP and DOWN trading options and Futures, BitMEX has taken crypto trading to another level.
Furthermore, their users have an insurance fund, which is the main topic of this article, so let’s dive into explaining what it actually is and how it functions.
What is an insurance fund?
In terms of trading, an insurance fund can be defined as a protective tool that shields from a trading contract loss. For example, let’s say that liquidation of the contract happens, and when the execution price is lower than the bankruptcy price, the insurance fund will be used to cover for the losses.
What is BitMEX insurance fund?
BitMEX insurance fund is marketed by the company as a tool to “help ensure winners receive their expected profits, while still limiting the downside liability for losing traders.”
What that means is that when a trader opens a leveraged position and their maintenance margin is too low, their position gets liquidated and there is an insurance fund, currently stated to be worth around 21,000 Bitcoin (BTC) ensuring that a trader doesn’t end up in debt.
However, BitMEX’s insurance fund doesn’t work exactly like its counterparts in traditional markets. Once the trader gets liquidated after opening a position with leverage on BitMEX, his equity related to the position always goes down to zero.
Here is how it actually works:
Say that the trader has:
- 100x long position
- 1 BTC
- price at the opening $9000
If the price of Bitcoin falls by 0.5% (to $8,550) the contract gets liquidated. Now, the 100 BTC position needs to be sold on the market. A trader that got liquidated has no consequence what the price of that transaction will be since he lost one Bitcoin in any case.
Therefore, we can say that BitMEX insurance serves more to ensure that winning traders get what they traded for than to ensure the losing party financial security. What BitMEX will do for the losing trader is that they have other mechanisms that ensure that the trader’s balance can’t go below zero.
Still, BitMEX warns that considering that the insurance fund is capped, an occurrence where there aren’t enough funds to cover all the winners’ gains is possible.
Do all trading platforms have an insurance fund?
Insurance funds are still not common among cryptocurrency trading platforms because simply put, these institutions are still not as powerful as the traditional exchanges. This also happens because of the very nature of the underlying assets.
However, some BItMEX competitors, like Deribit or OKEx do offer the same solution.
Should I trade on BitMEX? Pros and Cons
- High leverage
- Insurance fund
- Lots of different products
- No deposit/withdrawal fees
- BitMEX Testnet
- A high degree of knowledge needed to use the platform
- Trading in BTC exclusively