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Don’t 100x at BitMEX: The Liquidation Price vs. Bankruptcy Price Gap Means you Lose

Maintenance Margin protects the BitMEX insurance Fund, it does not protect you. High leverage trades waste a lot of your Initial Margin in the form of Maintenance Margin. Source: Blocklink.info
BitMEX fees for market trades are 0.075% of your total leveraged position (not just your margin) for both entry & exit. So total fees on a $1,000 trade with 100x leverage are $150 [100 x $1,000 x 0.00075 x 2]. Fees are 15% in that case. Save on BitMEX fees with this coupon

TL DR: The BitMEX Exchange offers Long and Short leveraged trades of up to 100x Leverage. At high leverage half your Inital Margin is Maintenance Margin. This protects the BitMEX Insurance Fund, it does not protect you. High leverage trades waste a lot of your Initial Margin in the form of Maintenance Margin.

Never use more than 25x because the Maintenance Margin Requirement at high leverage stacks the statistical odds against a winning trade. The MMR is the difference between the Liquidation and Bankruptcy Prices. Don’t worry about this issue at low leverage.

Example:

You buy $92.55 of Margin but your position is protected by only $46 of Margin. The chances of Liquidation and 100% Loss are greatly increased by BitMEX’s implementation of a Liquidation price. (BitMEX needs to do this to provide Limited Risk trading.)

You buy a $9,255 100x leveraged XBTUSD position with 1% margin, i.e. your stake is $92.55 of Initial Margin. Your Bankruptcy Price (Entry Price less 1% Margin) is $9,162 but your Liquidation price set by BitMEX is $9,209. The price just has to fall $46 (0.5%) from your Entry $9,255 to trigger your Liquidation at $9,209 and a 100% Loss. You are not protected by the $93 of Margin you paid for, just by a $46 slice of it. That is a trade for suckers. Trading with 100% leverage on a repeated basis (Long or Short) will inevitably result in losses. The BitMEX Insurance Fund wins. (Its current value is 6,909 BTC, or $65 million. That money came from salami-slicing the testicles of 100x bulls via the Liquidation Engine.)

N.b. The BitMEX analysis worksheets used in the Guide are available at Blocklink.info

Liquidation Price and Bankruptcy Price Explained

Trading conventional Futures Contracts on the CME or CBOT there is unlimited risk. The risk is not just your Initial Margin but the entire leveraged position. With standard futures contracts the Exchange will Margin Call the client for Maintenance Margin to supplement his Initial Margin when the price moves adversely to wipe out Initial Margin, and you can lose a lot more than your Initial Margin. So you would get a Profit/Loss Scenario like this for a Long (assumes Market Price of 11,670 at Entry):

BitMEX guarantees that your losses cannot exceed your Initial Margin. This asymmetry (unlimited profit, limited loss) is the beauty of the BitMEX Limited Risk contract, which is a BitMEX innovation.

So you get a Profit/Loss Scenario like this at BitMEX:

Note that your profit can exceed 100%, indeed it is unlimited, but your loss is limited to 100% (i.e. $1,167) , however much the Bitcoin price falls. Same with Shorts, but oppposite. The payour profiles at BitMEX look more like those for Options than for Futures.

How does BitMEX limit the risk of trading in this way?

The mechanics of the BitMEX solution are that BitMEX sets a so-called Liquidation Price a fraction above the Bankruptcy Price (in the case of Longs) or a fraction below the Bankruptcy Price (Shorts). When the market moves adversely against your position and approaches the Bankruptcy Price, and breaches the Liquidation Price, the Liquidation Engine takes over your position and liquidates it automatically at market. It adds any tiny profit made by the Exchange to the Insurance Fund, or deducts any loss made from the Fund.

Today (8 May 2018) the Insurance Fund holds 6,908 Bitcoin worth $65 million at $64.4 million at $9,354. The Fund is financed by the salami-slicing of the balls of 100x bulls via the Liquidation Engine and the gap between the Liquidation price and the (unpublished) Bankruptcy Price. Actually the platform only reveals your Bankruptcy Price in your Liquidation email.

Liquidation Price and Bankruptcy Price Calculators

There is a Liquidation price Calculator on the Platform.

There is no Bankruptcy Price Calculator on the platform.

I have written both Calculators on Google Sheets.

These calculators are on my site Blocklink.info under the BITMEX SHEETS tab.

E.g. at 100x Long — at current price of BTCUSD — your margin should cover you aganst a $92 drop in ordinary circumstances. In fact at BitMEX you get Liquidated after a $45 drop. You don’t stand a chance sucker!

The lower the leverage the less pronounced is this effect. At up to 10x Leverage you can forget about the Bankruptcy Price vs. Liquidation Price issue. You can see this in the final column. At low leverage most of rhe margin you buy s truly working for you.

You can read more about the Liquidation process on the BitMEX site. By the way this is not a criticism of BitMEX. I love their site and I love that they have engineered a solution to limit the risk of trading. Just don’t be a fool and trade 100x or 50x. The bank (actually the Insurance Fund) will win.

If you must trade 100x, Enter your Trade when XBTUSD Market is Calm

It seems the Maintenance Margin Requirement (i.e. the gap between the Liquidation and Bankruptcy Prices) is not fixed at 0.5%. Its value depends, I think, on the current volatility. During periods of calm the MMR is 0.5%. It seems to increase in volatilite periods. So if you insist on using 100x Leverage then start your trade when the market is calm and you will get better value from your trade.

BitMEX fees for market trades are 0.075% of your total leveraged position (not just your margin) for both entry & exit. So total fees on a $1,000 trade with 100x leverage are $150 [100 x $1,000 x 0.00075 x 2]. Fees are 15% in that case. Save on BitMEX fees with this coupon

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