Mutual Insurance Takes off As Bitcoin Futures Market Matures

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The crypto futures market is heating up. On June 30, Binance launched Compound perpetual contracts at 50x leverage, around the same time Beijing-based MCDEX debuted a novel decentralized ETH perpetual contract that has no expiry date. CoinFLEX, meanwhile, has unveiled a centrally traded repo market powered by deliverable perpetual futures and Bybit has reported strong demand for its new mutual insurance product from BTC-USD perp traders.

Of course, the popularity of perpetual contracts is an established trend, with trading volumes that regularly outstrip the spot market by a factor of 5:1. As the market matures, traders are enjoying a greater number of options, not just in terms of platforms but also derivative trading products, leverage and contract types.

Liquidated Longs Underline Inherent Risk of Futures Trading

With high leverage comes high risk: even savvy traders can get their fingers burned when the market moves against their position. Back in March, when bitcoin’s price tumbled to $5k, $1 billion in longs were liquidated overnight. Freak exogenous events were responsible for that crash, but even at the best of times, the crypto market is known for its volatility. 

It was events such as these that prompted derivatives platform Bybit to launch a mutual insurance fund to help traders enjoy short-term protection against liquidations on their longs and shorts. Insurance can be taken out for 2 hours, 12 hours of 48 hours, with traders able to insure all or part of their position. For example, a trader who has opened a long BTCUSD position can buy long protection to hedge against the potential downside risk, just as a trader with a short position can buy short protection to hedge against potential upside risk. 

In essence, whatever way the market moves, your premium will cover you in the event of a sudden market movement liquidating your entire portfolio.

Bybit supplied an initial 200 BTC to finance the fund, which will from here on be financed by traders who purchase premiums to cover their BTC-USD contracts. Compensation is automated when insured trades incur a loss, with the minimum threshold for insurance set at $500 and the maximum set at $200,000. As far as fees are concerned, Bybit charges 0.05% of the premium. Naturally, if the perpetual contract settles above the insured price, no insurance payment will be triggered.

An Emerging Trend

Bybit is not the only trading platform that has introduced an insurance fund in recent years. BitMEX, for example, uses an insurance fund to avoid auto-deleveraging traders’ positions. The 35,800 BTC fund operates differently to Bybit’s, and is used primarily to address unfilled liquidation orders before they are overtaken by the auto-leveraging system. Binance also operates a futures insurance fund, again with the aim of protecting users from auto-deleverage liquidations. It recently injected 30 million USDT into the fund after a fall in bitcoin’s price.

There is no way to guarantee success in crypto trading, but when used intelligently, insurance can secure positions and inoculate users from the volatility that is synonymous with the industry.

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