BitMEX has introduced a “capped price” system on speculative contracts. A contract that is capped will have a contract limit up and down based on the lowest and highest bankruptcy price of shorts and longs respectively.
This system will be applied to our XBT (quanto futures) and BVOL (volatility futures) contracts. The XBU series (inverse futures), which is intended for hedging, will not be changed.
Advantages
With highly leveraged contracts, it is possible for traders to reach negative equity during fast market movements. This causes a systemic loss on the exchange.
BitMEX has a new approach. The “capped price” system is a transparent and fair method to deal with highly leveraged speculative Bitcoin derivatives.
The “capped price” system is simple: the price of a contract is not allowed to reach a price that would cause a trader bankruptcy. Instead, contract limits are placed at the highest and lowest safe price. These limits are recalculated continuously. In the case of fast market movement, traders must be liquidated before the price is allowed to move further.
Traders placing orders above or below these limits are notified upon attempting an order. They can then make the decision whether they wish to trade the contract or not with full knowledge of the maximum gain available. Traders who hold existing positions may exit at the limit price if they wish and close any hedges.
Traders are in full control, and can withdraw realised PNL immediately.
Increased Leverage
The “capped price” system allows BitMEX to allow trading of riskier contracts with more leverage. The XBT quanto series Bitcoin / USD futures contracts will be the first to benefit from the new system. Leverage will be increased across all maturities.
New Leverage Table:
| Weeks to Expiry | Initial Margin | Maintenance Margin | Max Leverage |
| 2 | 15.00% | 5.00% | 20 |
| 4 | 17.50% | 7.50% | 13 |
| 6 | 20.00% | 10.00% | 10 |
| 8 | 22.50% | 12.50% | 8 |
| 10 | 25.00% | 15.00% | 7 |
| 12 | 27.50% | 17.50% | 6 |
“Capped Price” Overview
Assume that XBTM15 is capped. The current price is $100. The Bitfinex spot price is $100, and there are 30 days until expiry. The initial margin is 15%, and maintenance margin is 5%.
Traders A and B (A sells, B buys) trade 1,000 contracts of XBTM15 at $100. The position has a value of 1 XBT. Each trader deposits 0.15 XBT as initial margin.
Contract Limit Up = $100 * (1 + 15%) = $115
Contract Limit Down = $100 * (1 – 15%) = $85
The capped price is the bankruptcy price of each trader. A move of 15% up or down is the maximum each trader can withstand with the initial margin deposited.
Caps Follow Bankruptcy Prices
Trader A is very cautious and does not like to use the full amount of leverage provided by BitMEX. He deposits an additional 0.2 Bitcoin. A’s bankruptcy price is now $135 instead of $115.
Contract Limit Up = $135
Contract Limit Down = $85
Caps With Multiple Traders
Trader C enters the exchange and sells another 1,000 contracts to B at $100. Traders B and C each deposit an additional 0.15 Bitcoin as initial margin for the new trade. Trader C’s bankruptcy price is $115. The Contract Limit Up is the lowest bankruptcy price, therefore it is now $115 instead of $135.
Contract Limit Up = $115
Contract Limit Down = $85
Can You Trade Above or Below the Capped Price?
Trader D places a buy order for 100 contracts at $120. BitMEX rejects the order because it is above the Contract Limit Up price of $115. Trader D places a sell order for 100 contracts at $80. BitMEX rejects the order because it is below the Contract Limit Down price of $85.
What Happens At Settlement?
Before settlement, the spot price quickly rises to $120 before traders can react. The contract does not settle at that price as it is above the Contract Limit Up. XBTM15 will settle at $115. BitMEX will not cover the $5 difference.
If the settlement price is outside the cap, the contract will settle at the cap instead.
Fair Price Marking
To help prevent manipulation, capped contracts are subject to fair price marking. The Mark Price will equal the Fair Price for the purposes of Position Value and Unrealised PNL.
The Fair Price is calculated as follows:
Mark Price = Fair Price
Fair Price = Indicative Settlement Price + Fair Value
Indicative Settlement Price = The last traded price on Bitfinex (XBT) or a weighted volatility calculation (BVOL)
Fair Value = Indicative Settlement Price * % Fair Basis * (Days Until Expiry / 365)
The % Fair Basis is an annualised percentage number set by BitMEX. The number will be adjusted from time to time by BitMEX. BitMEX will attempt to chose a % Fair Basis so that the mark price resembles the last traded price of the futures contract, but that will not always be the case.
Fair Price Example
% Fair Basis = 20%
Days Until Expiry = 30
Indicative Settlement Price = $100
Mark Price = $100 * (1 + 20% * 30 / 365) = $101.64
Trader A buys 1,000 XBTM15 contracts for $102.
Position Value = $101.64 (the mark price) * 1,000 Contracts * 0.00001 XBT Multiplier = 1.0164 XBT
Unrealised PNL = ($101.64 - $102) * 1,000 Contracts * 0.00001 XBT Multiplier = -0.0036 XBT
Trader A sells 1,000 XBTM15 contracts for $103.
Realised PNL = ($103 - $102) * 1,000 Contracts * 0.00001 XBT Multiplier = 0.01 XBT
The Mark Price does not affect Realised PNL. Maintenance margin calculations are based on the Position Value, therefore the Mark Price affects the amount of margin needed for an open position.
Attempted Manipulation
Trader B has a trading strategy whereby he will push the price down to cause margin calls, and place buy orders at the Contract Limit Down. He hopes to make a profit by manipulating the market. XBTM15 is $100 and the Contract Limit Down is $85. The Mark Price is $101.64.
Trader B begins selling XBTM15 contracts down to $90 hoping to force traders who have a liquidation price of $90 into a margin call. The spot price does not move, therefore the Mark Price stays constant at $101.64.
Trader C has a liquidation price of $90. Once XBTM15 reaches $90, nothing happens. This is because the Mark Price has not moved. Trader B has been thwarted; he now has a greater and greater unrealised loss, and is at risk of margin call himself. Using the Fair Price does not allow malicious traders to manipulate the market.
Comments and Questions
BitMEX is listening to the community. If you have questions or comments about these changes, please feel free to email us at info@bitmex.com or use the BitMEX chat.