Bitmex Contracts

You probably know by now that in margin trading there are two ways to make money - betting on the rise, in other words going long and betting on the drop, going short.

In this article, I will explain different types of contracts that Bitmex provides traders with: futures and perpetual contracts. As a bonus, I will explain the fundamentals of inverse contracts in an example of XBTUSD and Quanto contracts in an example of ETHUSD trading pairs.

There are some key concepts to take into consideration with all the contracts on Bitmex.

First of all is a multiplier, which is the worth of one contract. This aspect is fairly simple, all altcoin contracts (except for ETHUSD) are worth exactly one instance of that coin, for example, one LTCM19 contract is worth 1 LTC. In the case of XBT, one contract is worth 1 USD.

Secondly, initial and maintenance margins are terms you might have come across. Initial margin means how much of the position must be in your own funds at the opening of the position, so it can be used to calculate maximum leverage. For example, ETH futures have an initial margin of 2% which means most leverage you can use is (1 / 2) * 100% = 50x.

The maintenance margin represents the amount of equity that the trader has to maintain on the position. For example, the maintenance margin of the XBTUSD pair is 0.5% + exit taker fee + funding rate.

If Steve bought 10,000 XBTUSD contracts @$10,000 with 10x leverage, meaning that he borrowed $9,000, which he has to pay back later. If the price drops to $8,500 Steve does not have enough funds in this position to return the borrowed money. To prevent this from happening we have a maintenance margin.

Now if the price actually drops to $9,020, then Steve would not have enough equity and his position would be taken over by liquidation mechanism, since 20 < 9,000 * 0.5%.

Futures are contracts that obligate owners to buy or sell certain assets or products with a predetermined price at an agreed time in the future. In the case of Bitmex, the asset or product is cryptocurrency.

Most futures on Bitmex are quoted in XBT, except for XBT futures that are quoted in USD. It means that if you buy Litecoin’s futures, the most important indicator for you is its price in XBT.

All futures on Bitmex are settled in XBT, which means that you receive profit always in XBT. With XBT futures it is accomplished with inverse contracts, which I will explain later in this article. Bitmex offers futures for XBT, ADA, BCH, EOS, ETH, LTC, TRX, and XRP.

To give you a real-world example, allow me to introduce Harvey - a friend of Steve.

Steve has had an enormous amount of luck recently on Bitmex so he has enough money to buy himself an apartment in downtown. Harvey’s wife, on the other hand, has just given birth to the beautiful twins, so they decide to move to the house in the suburb, where they have enough room for the family. It’s 28th of February, but Harvey can move on the 15th of December because of construction works. Steve and Harvey make a legal agreement that Steve will buy the apartment on the 15th of December with a price of $133,700.

In stable economic conditions, neither of them wins, nor loses. Now let’s imagine there is a serious economic crisis and the price of the apartment has fallen drastically to $100,000. This means Steve has lost $33,700 because he still has to buy the apartment for $133,700. In contrast, if there was economic growth, Steve would win from the trade, since the price would probably go up.

An important concept of futures is the settlement. A trader must always be aware of how and when do futures expire. To prevent price manipulation Bitmex, the settlement price is an average over a fixed period of time before the settlement time. That fixed period of time differs for different futures. It is always useful for the trader to know the settlement rules for the selected future. You can find settlement rules for each future on the Bitmex contracts tab.

A perpetual contract is similar to a futures contract with the main difference of not expiring. Bitmex offers two perpetual contracts - XBTUSD and ETHUSD.

The price of perpetual contracts is kept close to the actual price of the asset. For example, if Steve buys $1,000 worth of XBTUSD perpetual contracts, he receives almost the same value of XBT in contracts as if he has just bought Bitcoin itself. This tight association between the contract price and actual price is achieved using the funding.

Funding is a periodic payment between shorts and long. Funding happens every 8 hours - 04:00 UTC, 12:00 UTC, and 20:00 UTC. Who pays who and how much is decided by funding rate for that period. You can find the funding rate in Bitmex on the bottom left of your screen. In case the funding rate is positive (like in the picture) longs pay shorts and vice versa if the funding rate is negative.

Bitmex also shows you how much time is left for the next funding. An important aspect here is that you only pay or receive funding if you possess an open position at the funding timestamp. The funding rate basically shows how did Bitmex price for the pair differ from the actual price in the last funding period. If Bitmex price was mostly above the actual price the funding is positive, if Bitmex price was mostly below actual price then the funding rate is negative.

Guess what! Steve is back…

Steve holds 10,000 XBTUSD long perpetual contracts with 10x leverage at the time of funding. Funding rate at the time is 0.2052%, which is awfully high. The price of XBTUSD is exactly $10,000, so Steve’s position value is 10,000 / $10,000 = ₿1. Now since Steve owns 10,000 long contracts he has to pay the funding.

Important aspect to note is that Steve has to pay funding for his whole position - 10,000 contracts, not only on his invested funds (which were $10,000 / 10 = $1,000). So Steve has to pay ₿1 * 0.2052 / 100 = ₿0.002052 ~ $20.52. This makes ($20.52 / $1,000) * 100 = 2.05% of his investment.

Depending on how long Steve decides to keep his position open he might pay a significant amount to funding. On the other hand, if Steve had short contracts he would receive the same amount of funding.

Before first funding Steve had no clue that he has to pay anything just for keeping a position open, but thank god he noticed it the first time. Steve is now able to manage his positions and funds better.

While the two following sections might not be the most important aspects for a Bitmex trader, they sure are interesting. Be like Steve, who is always curious about how not straightforward mechanisms work in the world.

On a normal market if you see the price of an asset to be $1,000 dollars. You buy that asset, now assets price rises to $1,200, so you would assume that you have just made the easiest $200 dollars of your life.

But now imagine Bitmex you see a price $1,000 of a trading pair XBTUSD, how is it possible that you actually buy the asset in XBT and receive your profits as well in XBT, weird Uhm…

This kind of behavior is made possible by inverse contracts. Steve wants to buy 1,000 long contracts of XBTUSD with 1x leverage @$10,000. Basically, he invests $1,000 into those contracts since leverage is set to 1x (by the way no idea why would anyone ever buy something with 1x leverage). What actually happens now is Bitmex calculates the contract value into XBT, so Steve has to pay 1,000 * 1 / $10,000 = ₿0.1.

Now Steve has a good karma and price goes up to $15,000. Steve decides to take the profits and sells his contracts. Steve has now made a profit of 1000 * (1 / $10,000 - 1 / $15,000) * 100 = 33.33%, which is not 50% as many of expected.

I know i assumed the same thing when I got into market. It actually makes sense, Steve did earn ₿0.1 * 0.3333 = ₿0.03333, which equals ₿0.03333 * $15,000 = $500 at exit price, as you might have figures out by now it is 100 * ($15,000 - $10,000) / $10,000 = 50% profit in USD.

You thought inverse contracts were confusing, re-think it. Imagine ETHUSD and remember Bitmex balance only has XBT. What the hell? How can I buy $300 worth of ETH in XBT, that cannot be right? Yet it is made possible by Quanto contracts.

To achieve the described scenario variable called Bitcoin multiplier per $1 is introduced. This is a constant value of 0.000001 XBT. Another aspect of Quanto contracts is that the contract value is not constant. In an example of ETHUSD, the contract value is the price of ETH in USD times Bitcoin multiplier per 1 USD. So if Steve buys 100 contracts @$300 with 1x leverage he pays 100 * ₿0.000001 * $300 = ₿0.03.

Now Steve already has his fifth birthday this year, and the price of ETH increases to $400. Steve decides to take profits and sell his contracts so he receives 100 * ₿0.000001 * $400 = ₿0.04 making the profit of 25% as expected. Wasn’t that difficult, huh? Like a wise man once said, “Everything in this world is actually easier than it seems”.

Now you know everything about contracts, it is time to proceed to the order types article.