Bitmex tutorial — Bitcoin Futures and Margin Trading

Bitmex tutorial — Bitcoin Futures and Margin Trading
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Bitcoin derivatives are in high demand like never before, and their development is only accelerating. A derivative is an instrument that allows investors to trade in assets indirectly — that is, not by the asset itself, but by any kind of obligation to transfer it or units of value created on its basis.

BitMEX is a bitcoin derivative exchange managed by financial experts and bankers Arthur Hayes, Samuel Reed, and Ben Delo, who have worked in traditional stock markets. The exchange offers margin trading with the highest leverage on the market — up to 100:1 — as well as a whole package of futures contracts. The cost of bitcoin futures is calculated from the BitMEX.BXBT index. This index is formed with the support of bitcoin exchanges GDAX and Bitstamp.

The exchange was originally conceived only as an exchange for trading in contracts. Only its derivative contracts are therefore traded. Due to this, they all are noticeably simpler with licensing/regulators, and, as is contained in the rules, there are no plans for deposit/withdrawal of fiat.

Advantages of Bitmex

Up to x100 leverage.
Liquidity of swaps and futures — the trading volume of the XBT/USD pair on the Bitmex exchange is the first in the world.
Very convenient and functional interface, understandable to those who are familiar with trading.
You can trade futures absolutely anonymous, which is a huge advantage for those who don’t want to leave their personal data on the exchange for confirmation. To verify your account, you only need to confirm your email address. After passing through a simple and quick verification process, you will have access to trading without restrictions.
No hot wallets, bitcoin withdrawals can be paid out two times a day after manual verification.
Funds are deposited to or withdrawn from BitMEX only in bitcoin. Bitcoin is also used to secure any contracts on the platform, be it BCH/XBT, LTC/XBT or any other trading pair.
For some people, Trollbox is an added advantage, but I would say that for me, chat distracts more than any valuable information it I could get from it.
Good customer service.

To start with, I would say that trading derivatives is as easy as trading any cryptocurrency pair. Futures contracts are a legally binding agreement to either buy or sell the supply of the underlying instrument at the price specified at the moment for delivery at some time in the future. Purchase or sale of the supply of an underlying instrument is like the purchase or sale of an apartment for example, today, when the apartment is not yet built, and then receiving the keys to the house within a specified period. We are buyers, while the builder is the seller, thus creating supply and demand. Upon expiry of the contract, delivery should occur if the same opposite transaction was not conducted for the expired period.

Futures do not require a 100% margin, which allows you to trade with an up to 100x leverage for some contracts. All margin values ​​on BitMEX are denominated in bitcoins, which allows traders to speculate on the future value of a contract, using only bitcoins.

Aristotle’s Politics contains one of the earliest written mentions of futures trading — Thales, a philosopher from Miletus, developed what’s described as a “financial device, which involves a principle of universal application.” Based on astronomical data, Thales predicted that the olive harvest would be exceptionally strong in the autumn of next year. Confident of his prediction, he made agreements with local olive-press owners in Miletus and Chios to deposit his money with them, guaranteeing that he could use their olive presses when the harvest was ready. So Thales secured low prices on his contracts as nobody knew whether next year’s olive harvest was going to be large or small. The olive press owners wanted to hedge against possible very low incomes due to the possibility of a poor harvest. When the harvest was ready, the huge demand for olive presses significantly outstripped supply. Thales could sell his olive press contracts much more expensively, making a lot of money.

Margin trading in plain language

Margin trading is the method of conducting asset purchase/sale transactions (in our bitcoin example) using cash that is provided to the trader as a secured loan. The term “margin” itself means a pledge that a trader must provide to the exchange in order to receive a certain amount.

Leverage is borrowed funds that the exchange gives the user to buy bitcoins. But it is expressed in the form of a coefficient.

Take profit is a pending order that is executed when the market price hits profit. By setting a TP, we decide where our target level will be and if the price reaches this level, the order is triggered and profit is earned.

Stop Loss is a guarantee of the safety of your deposit from a sudden drop in price. Once a stop loss level is reached, the trade automatically closes, as in the case of take profit, but in this case, loss is minimized, and sometimes the entire deposit is rescued.

A long position is a position that a trader opens hoping to gain profit from market growth. The trader enters into an agreement to buy futures at a cheap price, waits for the price to rise, sells at a higher price, and thus profits from market growth.

A short position is a position that a trader opens hoping to make profit from a fall in the price of bitcoin. To do this, the trader takes bitcoin futures borrowed from a broker, sells them on the exchange at a higher price, waits for the futures price to fall, buys contracts at a price cheaper than he bought them, gives the loan back to the broker, and keeps as profit the difference between the expensive sale and the cheap purchase. Thus, the trader profits from market decline.

Earning on a market growth:

An example of a non-leveraged trading.

Our balance is $1000. The price for 1 BTC is $1000. Accordingly, we can only buy 1 BTC with the whole money. The bitcoin price has doubled, our profit is 99% or $1000 minus the standard 0.25% purchase commission and 0.25% sale commission of the exchange (Bittrex). So our net profit will be: 1 BTC purchase–0.25% = 0.9975BTC, 0.9975BTC sale * $2000–0.25% = $1990.0125.

1. An example of leveraged trading.

Our balance is 1 XBT, the leverage is x10 and the price for BTC is $1000. Now we are opening a long position worth 1,000 contracts with a margin of x10 for $1000. 0.1 XBT (part of our funds) * 10 (leverage)–0.075% (taker fee). The final price of one thousand contracts at x10 will be 0.1015 XBT. As a result, 0.8985 XBT of free funds. After a few days, the swap price grows to $2,000 and we congratulate you, you have waited and are going to sell your contracts.

Our profit will be: 1000 * 1 * (1/1000–1/2000) = 0.5 XBT — 0.00075 XBT (taker fee) = 0.49925 XBT minus the funding rate for long positions (0.0025845 XBT for 2 full days for which you pay shorts). Our ROI will be approximately 491%. The final balance: 1.3951655 XBT.

Long funding — i.e. if we open a long position, then we expect a price increase, and we wait for a long time, and since we opened a trade using leverage, its funding must come from someone’s pocket, for example, Bitmex funding occurs between users of long positions and users of short positions. Accordingly, if the funding rate is positive, then users with long positions finance the margin of users of short positions.

And vice versa — short funding. If the rate is negative, users of short positions finance the margin of long positions

Earning on a downtrend:

1. An example of non-leveraged trading.

Our balance is $1000. The price for 1 BTC is $1000. The BTC/USD pair shows a downtrend. It is extremely difficult to earn on such a situation. There are several options to either switch to altcoin (VTC), or to work by levels and on rebounds. Let’s assume you use the entire money (not recommended) to buy bitcoin for $1000. The options are:

1/ Wait for 5–10%, earn from 50 to 100 USD.

2/ The price reaches $900, stop loss 10%.

3/ The price drops to 700, we are a long hodler.

1. An example of leveraged trading.

Our balance is 1.4 XBT, leverage is x10 and the price of BTC is $1000. Now we are opening a short position worth 1000 contracts with a margin of x10 for $1000. 0.1 XBT (part of our funds) * 10 (leverage)–0.075% (taker fee). The final price of one thousand contracts at x10 will be 0.1015 XBT. As a result, 1.2985 XBT of free funds. After a few days, the swap price falls to $500 and you are ready to redeem the contracts that you borrowed.

Our profit will be: -1000 * 1 * (1/1000–1/500) = 1 XBT–0.00075 XBT (taker fee) = 0.99925 XBT + funding rate for long positions (0.000883 XBT for 2 full days for which longs pay us). Our ROI will be approximately 985%. Our final balance: 1.299494 + 0.99925 = 2.298744 XBT.

In these examples, it is clear that in the derivatives exchange, it is easy to earn both on price growth and on price fall.

Hedging using futures

Hedging is based on the fact that a price change in the cash market (GDAX and Bitstamp) and in the futures market is interconnected. Price movements are not necessarily identical, but, as a rule, are so similar that taking the opposite position in the futures market can reduce risk of losses in the cash market.

Taking the opposite position compensates for the loss in one market using the profit in the other. Thus, the hedger can establish a fixed price level in the cash market for the trade that will be executed only after some months.

To understand the hedging mechanics better, let’s assume that we are in May now and that you are a miner, or a crypto farm owner, who bought a mining hardware but have not yet started mining bitcoins. Using market terminology, one may say, that you are occupying a “long position” in the cash market.

To protect yourself against possible price fall in the coming months, you can be insured (hedge) by selling the corresponding number of bitcoins in the futures market now and redeeming them back when the time comes to sell them in the cash market. If there is a price fall in the cash market, losses incurred will be compensated by profit generated from futures hedging. This type of hedging is known as a “short hedge” because of the initial short futures position.

Having futures, you can first sell and then buy later, or first buy, and sell later. Regardless of the order of trades, buying at a reduced price and selling at a higher price leads to profit on the futures position.

Initial sale with the intention of buying back later means a short position in the futures market. A price fall will lead to profit because you can sell at a higher price and buy at a lower price.

Let’s go through the interface quickly

The -6478 contracts means that I opened a short position at a price of 6478 using x10 leverage. In this image, you can see that the funding rate is positive, which means that longs pay shorts.

For more detailed statistics on all trades, including funding and commissions, follow the link Trade History.

Buy/Sell

1/ Limit orders — we set the price at which we are ready to buy or sell a futures contract.

2/ Market orders — we buy/sell at market price.

3/ Stop orders are orders that are registered in the exchange book only after the price of the asset reaches a certain level (more).

Next to Place Order, you can click on the calculator, which will easily help you calculate the short and long position.

It’s also easy to keep track of your open/closed positions, active/executed orders, stops and order history at the bottom side of the interface.

You can close an open position with a single click on the Market button.

At the top of the interface, you can choose any trading pair.

In order to deposit or withdraw funds, click on Account, and then on Deposit or Withdraw — depending on what you want.

Support

The trading platform has a round-the-clock multi-channel support service. Of course it is not a perfect support service, but employees always try to help users out with any issue. It takes an average of 1 hour to respond to an inquiry — not every service can boast of this speed.

Most of the complaints are mostly technical in nature — users mostly complain about the complexity of the interface.

Key takeaways

BitMEX enables traders to make money both on an uptrend and on a downtrend. This exchange will definitely gain popularity among traders thanks to its enormous volumes. First of all, it should be of interest to major players with large deposits, as well as to those who are interested in trading cryptocurrencies with leverage.

If you were looking for a reliable exchange for hedging your positions, with a large leverage and rich functionality, then this is exactly what you need.

I recommend you read: Trading on BitMEX. (https://www.bitmex.com/app/tradingOverview)

Wishing you a profitable trading, friends!