How Crypto Derivatives Products Reduce Counterparty Risk 

Traders who simply wish to buy and hold Bitcoin are recommended to either store their funds in cold storage, or keep them on a trustworthy and credible exchange. Exposure to counterparty risk only comes with a lack of understanding of the security and custody infrastructure of the counterparty – in this instance, the exchange. 

The first step to avoiding counterparty risk is to use an exchange that implements the right controls and security measures which ensure your assets are protected at all times. 

BitMEX puts protection of client assets at the centre of all its operations. We do not compromise security for convenience, which is why we’ve lost zero cryptocurrency since 2014. Most importantly, we ensure that client funds are securely segregated at the account level and ring-fenced from company assets. They aren’t lent, staked or traded. We’re not a trading house, we’re an exchange, with no exposure to VC money or any other liabilities. For more on our asset security and custody infrastructure, visit this page.

Another way to reduce counterparty risk is to use crypto derivative products, making them a popular option amongst seasoned and risk averse traders. Derivatives allow traders to speculate on Bitcoin or other digital assets, without exposing 100% of their capital to counterparty risk. Moreover, there is no physical settlement of any asset (unlike margin trading) as they are bilateral contracts enforced by an exchange, which means the leverage can be higher. On BitMEX, up to 100x is offered. 

Reducing Counterparty Risk with BitMEX

Let’s say a trader has 100 XBT of capital. They wish to speculate on the future price of Bitcoin and select BitMEX’s Bitcoin / USD swap product – XBTUSD to do so. They can also do so with up to 100x leverage. 

Please note that XBT is what we call Bitcoin at BitMEX, exactly the same as what some other platforms call BTC.

This means the trader only needs to deposit one XBT on BitMEX to trade the full amount of their 100 XBT capital. 

It is recommended that if one is willing to trade with such leverage, the remaining 99 XBT be held safely in storage. More realistically, it is recommended to hold at least 10% equity in storage to avoid liquidation. 

This means through XBTUSD, the trader is only exposing 1% of their XBT capital to counterparty risk. This is why institutional and professional traders come to BitMEX – to trade derivative products that allow them to maintain the majority of their digital assets in safe custody, while trading large positions simultaneously. 

For more educational resources on trading at BitMEX, we invite you to head here for our growing portal of educational guides that cover trading, and the wider cryptocurrency ecosystem. 

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