The market is gloomy and the bull run is looking further away each day! Most Crypto traders find themselves at a loss only because they have relied heavily on one strategy win in a bull market – if that’s you, you need to broaden your game!
Bitmex is an exchange where you can speculate on the price of Bitcoin and other cryptocurrencies through derivative contracts. Started by CEO and former Deutsche Bank equity derivatives trader Arthur Hayes and two others in 2014, Bitmex has grown to conduct $3 Billion in daily trading volume this year. The derivatives contracts offered on Bitmex are the key difference which separates Bitmex from other exchanges and makes it an attractive option for traders. Traders are lured toBitmex through the ability to take both long and short positions and also can avail of enormous amounts of leverage, up to 100x. It is one of the only places traders can go to try and profit in a bear market. Another key difference between Bitmex and other exchanges is that Bitmex operates only in Bitcoin. If you speculate correctly with your trades, you will increase your balance of Bitcoin, and if you speculate incorrectly, your balance of Bitcoin will decrease.
This is the dashboard you will be presented with upon logging in to Bitmex:
The most popular instrument on the platform is the XBTUSD perpetual. This instrument tracks the price of Bitcoin versus the USD dollar and does not expire. All altcoin instruments are priced in their Bitcoin price and have an expiry date. Futures contracts in the traditional market typically have an expiry date where the underlying asset is delivered. When a Bitmex contract expires, the position is automatically closed with whatever profit or loss is logged at the time. Altcoin contracts include:
- Bitcoin Cash
- EOS Token
The price for the instruments track a price index which is determined by Bitmex based on factors such as liquidity. The price index for the current XBTUSD perpetual contract tracks the average price of GDAX and Bitstamp. The exchanges being tracked for the price index can change from time to time. Derivatives are traded through contracts with each contract representing 1USD of the underlying asset. For XBTUSD, this would mean that each contract represents how much Bitcoin you would receive for 1USD. Settlement of contracts is guaranteed by a fund which currently has approximately $50 million worth of BTC.
Orderbook and Liquidity:
On the dashboard, you will also find an orderbook, real-time trades printing, & a depth chart. These are useful tools for traders in the analysis of real-time demand and supply. Note that the bid-ask spread is 0.5 which is acceptable given the volatile nature of derivative products. Spot markets such as GDAX trade within 0.01 for the bid-ask spread.
By hovering your mouse over any point on the depth chart, you will receive information on how many contracts are between the point you are hovering over and the current market price. Also, you will receive the percentage difference in price between the points as illustrated in the below figure.
Bitmex have also recently announced that they have an affiliated but separate and distinct for-profit market making desk whose function is to provide additional liquidity to the platform.
Bitmex uses TradingView to power their charts so technical analysis can be completed by traders on the Bitmex dashboard or alternatively, they will be able to access the Bitmex instruments from TradingView. The charting tools provided by TradingView are some of the most widely adopted across the trading profession and community due to their diverse range and intuitive use.
Bitmex reports that all funds are stored 100% in cold storage and all transactions completed are multisig. Due the multisig aspect of security, withdrawals take longer than other exchanges and are only operated about once a day. No hacks have occurred in the history of Bitmex. Security at Bitmex appears to be at a high level and is definitely on the higher end of industry standard for cryptocurrency exchanges. Two-factor authentication can be enabled by traders as additional security.
Trade Execution, Leverage, & Execution:
This is the most important part of this review as it is the part which pertains to the usage of Bitmex for trading. Firstly, we will cover the varying types of orders, followed by leverage and how it works, and lastly, we will cover the fees associated with the varying types of execution and leverage. On Bitmex, there are three types of orders:
The three order types include Limit, Market, & Stop Market and are detailed in the table below. The final two columns of the table relate to fees and will be explained in further detail when fees are discussed. Provided the leverage is not set to “Cross”, the total exposure you will have on any one trade will be specified by the amount “Cost” as illustrated above. This will be explained further as we discuss leverage. The total order value taking into account the leverage you apply is noted by “Order Value” as illustrated above also.
|Order Type||How it works||Long Example||Short Example||Maker/Taker||Fee|
|Limit||Place an order to execute a trade if price reaches a specified target or more attractive||If the market is at $7800, a buy limit order is placed at $7600. Trade executes if market drops to at or below this price.||If the market is at $7800, a sell limit order is placed at $7900. A short trade is executed if the market price rises to or above this price.||Maker||-0.025%|
|Market||Execute a trade at the best possible price.||Market buy 2000 contracts when bid-ask spread 7555.5-7556. There are no guarantees that the order will be filled at the ask price of 7556.||Market sell 2000 contracts when the bid ask spread is 7555.5-7556. There are no guarantees the order will be filled at the bid price of 7555.5||Taker||0.075%|
|Stop Market||Order that does not enter the order book until the market reaches a certain trigger price. Stop order becomes market order once the trigger price is reached.||Market trading at $7200. Stop order put in place at $7250. If market rises to $7250, market order is put in and will be filled at this price or above.||Market is currently trading at $7400. Stop order put in place at $7350. If price drops to $7350, market order is put in and will be filled at this price or below||taker||0.075%|
Once a market order is placed, it will be filled almost immediately depending on the state of liquidity. Once filled, it will appear under the “Positions tab” as illustrated below. “Unrealised PnL” tracks how the position is performing in terms of PnL. Bear in mind that this will always be noted in Bitcoin value. Once you close out some of your position, the PnL for the part of the trade you closed will be recorded under “Realised PnL”. A funding rate is applied to active positions and once the rate is applied, you will see it recorded in the “Realised PnL”. The funding rate will be explained below. Once a limit order is placed, it will appear in the “Active Orders” tab. Once the order is filled, it will move to “Positions”. “Closed Positions” records recently closed positions along with their recorded PnL. “Stops” records any stops which are in place. Fills and orders are also recorded in their own tabs.
Bitmex is well known for providing significant amounts of leverage to traders. In the perpetual XBTUSD contract, this leverage can go up to 100x and for other contracts, the leverage can go up to 50x. Traders are also able to change the leverage in the middle of a trade. For example, a trader could start a trade at 10x leverage and move it up to 100x at a later stage. You can risk up to a total amount of 200 Bitcoin for any trade and there are no tiers for this as there often is with other exchanges.
Prior to placing an order, pay specific attention to the cost. The total exposure for any one trade is specified by the cost as seen below. This is provided that the leverage bar is not set at “Cross”. If the leverage bar is set at “Cross”, this will spread the exposure out over all open trades and if one trade approaches the liquidation price, it will take away from another trade to keep it open.
How is it possible that Bitmex can offer such high levels of leverage without suffering some losses when trades are failed to be exited before becoming unprofitable. Bitmex has a margin of safety when it comes to leveraged trading. When you enter a leveraged trade, there is a bankruptcy price where the value of your equity reaches zero and your trade just consists of Bitmex margin. Imagine a 10x trade where the notional amount of the trade is 1 Bitcoin and the equity you staked is 0.1 Bitcoin. If the trade moves against you, your equity diminishes until it reaches bankruptcy. The margin of safety Bitmex applies is setting a liquidation price before the bankruptcy price as illustrated below. When your trade hits the liquidation price, it is immediately liquidated. Any profit Bitmex makes on executing this is put into a fund which guarantees the settlement of contracts. Any loss Bitmex takes is taken from the fund. This structure makes it highly skewed towards getting liquidated when applying 50x and 100x leverage as the liquidation price is extremely close to the entry price.
The first thing to note with fees is that they are applied to the full leveraged amount of the trade. For example, if you risk $1k in equity but apply 10x leverage, the fees will be applied to $10k. There are different fees for market makers and market takers as is the case with nearly all exchanges. Market makers play an important role in providing liquidity and avail of lower fees for this reason. The word market maker means participants who make the market by placing some kind of limit orders. These orders are placed in the order book and play an important role in determining the current price of a security. The order book is a key tool used by traders in making their decisions meaning that market makers play an important role. Market takers on the other hand take whatever price is currently offered by the market. They pay higher fees for the ability to be able to get in to the market. In times of high volatility and movement, the price market takers enter at could be far away from the price listed when they market buy or market sell. The fee for market makers is -0.025% which means that market makers actually receive a rebate, and this is the reason why “Realised PnL” can be in the green immediately after entering a position. The fee for market takers is 0.075%.
There is also a funding rate applied to open positions. The funding rate is subject to change and varies for each contract. This rate is applied every 8 hours. The funding rate is exchanged between users and essentially means that the shorts pay the longs, or the longs pay the shorts. Generally, in a bull market the longs will pay the shorts every 8 hours for having a position open. Conversely, in a bear market the shorts generally pay the longs. The current funding rate for the XBTUSD is 0.01%. When positive, it means the longs pay the shorts. This means that currently every eight hours, the open longs in XBTUSD pay the shorts 0.01% of the notional amount of their position.
Alternative Uses for Bitmex:
Although mainly used for speculation, derivatives can be used for other purposes as well such as arbitrage and hedging. One example of hedging is where cryptocurrency miners lock in profits ahead of time when future contracts are trading at a premium to spot prices.
Summary & Takeaways:
Bitmex is a popular platform used by traders. It gives traders the ability to both go long and go short as well as the option to apply enormous amounts of leverage. The platform conducts about $3 Billion in daily volume this year. The platform contains a lot of intricacies which can be missed by the novice trader. Most importantly for traders beginning to use this platform is to understand their risk exposure. Provided the leverage is not set at cross, the exposure for any given trade will be specified by “Cost”. Fees should be noted as applying to the total leveraged position (i.e. notional amount) and funding rate should also be taken note of. Platform is also used by those seeking to hedge and arbitrage.