- Bybit released a new insurance fund that protects traders investments.
- Using the new feature investors can trade cryptocurrencies with a much lower risk.
As Crypto Twitter gets busy dissecting BitMEX “scam wicks,” a new risk management tool for perpetual contracts is hinting at a better future. Dubbed a mutual insurance fund, the war chest for derivatives traders was launched by Bybit in May and initially funded by 200 BTC from the firm’s pockets. Essentially, it gives circumspect traders the option to build protection into their perpetual contracts for times when the market moves against them. Every time a trader buys such a premium, the fund grows for the benefit of the whole community.
Long and short cover to hedge downside risk
Minimizing exposure to loss is a must for traders, who run the risk of being liquidated every time they open a trade and up the leverage. As with regular futures, perpetual contracts have forced liquidations which occur when the spot price passes a certain threshold. By utilizing Bybit’s mutual insurance fund, traders of the platform’s flagship BTCUSD contract can immunize themselves from short-term fluctuations that have the potential to violently liquid a long or short.
While the crypto market’s inherent volatility is often celebrated by savvy traders who make a killing with blood in the water, the risk of perpetual contracts expiring in a loss represents a clear and present danger. The liquidation of highly leveraged positions can be particularly brutal, and continuous market monitoring is required to mitigate the threat of heavy losses. Of course, everyone gets caught out once in a while.
The answer, as far as Bybit and some other derivatives platforms are concerned, is a form of insurance for traders that protects them against assets rising or falling. While certain conditions must be met, this two-way hedge lets traders determine the percentage of their position they’d like to cover, without threatening their potential upside.
Bybit’s mutual insurance fund can be optioned for a set period, be it a few hours or a couple of days. If the trader’s position is liquidated within that time-frame, the insurance payout will be triggered automatically. If rather than being wiped out their position is partially liquidated, a proportional payout will be made.
How to avoid liquidation and hold out for more profit
Instead of a worst case scenario being eye-watering losses when the market rapidly moves against the trader’s position, the mutual insurance fund means that a trader’s maximum loss would be the price paid for the premium itself. In Bybit’s case, the minimum insurance amount is $500 (to cover the corresponding amount of BTC contracts) while the maximum is $200,000 per order.
Of course, it’s not just a question of forestalling the abject misery that comes from having your position liquidated. The mutual insurance fund offers traders the measure of confidence needed to keep positions open for longer and potentially close out at the most advantageous moment. As such, it can be a priceless asset in the toolkit of seasoned and sophisticated traders.
While the mutual insurance fund could be considered a godsend for savvy traders, it does add an element of complexity to one’s trading strategy. Ultimately, it’s a tool that should be utilized by those who know what they’re doing already and have a sound strategy going forward. Providing that’s the case, introducing a layer of price protection to your perpetual contracts is a no-brainer.
