The extreme volatility of March 12-13, left many traders reeling. And also with many questions. Today, the main cryptocurrency derivatives exchange BitMEX opened on its insurance fund.
In its official blog post, BitMEX explains that the exchange received many questions about the performance of its insurance fund on March 12-13. It also details what the insurance fund is and why it is necessary. Contrary to popular opinion, BitMEX states:
"It does not cover BitMEX's running costs or contribute to BitMEX earnings."
"It is not used to influence markets, intentionally or otherwise."
Today we answer your questions on the Insurance Fund and how it performed on 12 and 13 March. Please refer to our blog: https://t.co/UbagNecszP pic.twitter.com/37PKWuhOFT
– BitMEX (@BitMEXdotcom) March 23, 2020
The insurance fund, the company says, is in place to try to prevent automatic deleveraging (ADL). This is where the positions of profitable traders devalue against liquidated positions to avoid bankruptcy. During the "unprecedented volatility" of March 12-13, the fund acted as "the last line of defense" in trying to prevent ADL.
“The Insurance Fund exists to act as a last line of defense to prevent ADL. On March 12 and 13, despite the extreme movement in the market, ADL was completely avoided. ”
BitMEX also notes that, unlike traditional exchanges, its traders never owe more than the published margin thanks to the size and shares of their fund.
The post continues with the detailed terms that traders should be aware of when using the exchange, such as the bankruptcy price and the settlement price and when the settlement engine will take over. Actually, 80% of the post deals with the settlement process. You can probably skip to the part that most people want to read:
What was the performance of the settlement engine and insurance fund on the selected days?
The word on the street is that BitMEX suffered a cascading margin call that forced traders to go out and sent BTC in a tailspin in the process. BitMEX then went offline due to hardware issues and the price recovered about 30 minutes later.
“The trading algorithm triggered this market position at prices that gradually became more aggressive (lower) as the longs grew and its time to hold the position progressed.
During this time, the commercial activity of the Settlement Engine realized significant losses, crystallized as withdrawals from the Insurance Fund ”.
However, the exchange doesn't explain how that contributed to their hardware issues. Also, another point that BitMEX does not seem to have responded as well is why the Insurance Fund suffered so little loss. In fact, he actually made a profit.
No comment on why / how you made money with the insurance fund…
– Downstream Trader (@ Trader564) March 17, 2020
According to the last post:
"The largest reduction on March 13 was 2,606 XBT."
BitMEX's insurance fund is currently located at 35,028,2986 XBT. If the fund does not serve, as the company claims, as a source of profit for the company or influences the market, how is it that instance funds like Deribit suffered so much damage while BitMEX remained practically intact?