Trading with Bybit: Liquidation, Margin, and USDT Contracts

28.06.2020

There are two kinds of people who hold cryptocurrency: investors and traders. Investors don’t make deals very often, sometimes only once in a few years, if at all. Traders do it often, many even on a daily basis.

Disclaimer: forklog.media does not provide financial advice and cannot be held responsible for the readers’ investments.

Perpetual Contracts, Leverage, and Margin

A perpetual contract is a contract for purchase or sale of an asset without an expiry date, meaning traders can hold onto them for as long as they want. This is in contrast to futures, which requires settlement at a specified date in the future.

The perpetual contracts available on Bybit are BTC/USD, ETH/USD, EOS/USD and XRP/USD inverse perpetual contracts, and BTC/USDT linear perpetual contracts. The difference between the two is that for inverse perpetual contacts, the underlying cryptocurrency (BTC, ETH, etc) is used as margin, and for linear perpetual contracts USDT is used for margin.

BTCUSDT ticker example

Bybit perpetual contracts offer up to 100x leverage, which can be adjusted at any time. This is essentially money loaned to the trader from the exchange.

To get the loan in the first place, a trader deposits the initial margin. It works as the platform’s insurance against potential losses that traders may face. If losses reach the amount of the initial margin, the exchange takes the deposit and closes the position. This process is called liquidation.

Platforms typically show traders the liquidation price. The liquidation price is calculated based on the trader’s selected leverage, maintenance margin (minimum margin needed to keep a position open), and entry price. In the event of liquidation, all the available balance of the currency is lost.

Typically, the maintenance margin amounts to 0.5–0.7% of the total value of the deal. Bybit’s maintenance margin is 0.5%.

Therefore, if you buy $1,000 worth of contracts with 10x leverage. It would require an initial margin of $100. If losses hit $95, the exchange will liquidate the position.

Initial margin covers the losses, the maintenance margin services the platform

Inverse BTCUSD contracts

These contracts can be traded without an underlying asset. To trade an inverse BTCUSD contract you would need Bitcoin, not dollars.

The main advantage of an inverse perpetual contract is flexibility. It lets users trade contracts quoted in USD with Bitcoin as collateral. The disadvantage is the volatility of the profits and deposits.

Thus, if you bought a BTCUSD perpetual contract at $9,000 and closed the deal at $10,000 earning 0.1 BTC or $1,000. Overnight, the BTC price dropped to $5,000. You closed the deal, but if you hadn’t and decided to wait until the next day, the profit would have decreased to $500.

Linear BTCUSDT contract

The stablecoin (USDT) is pegged to USD, so the charts for BTCUSD and BTCUSDT are nearly identical. Meanwhile, the value of a USDT deposit won’t decrease because of a sudden drop in the Bitcoin price.

Thanks to Tether, BTCUSDT has lower associated fees and risks

Reducing Risks with Cross Margin

Leverage is a useful tool but it comes with risks. Platforms typically offer several multipliers starting from 1.1 to 100x. Conservative traders often don’t use leverage because although it can amplify profits, it can also hasten losses.

Risks can be controlled using cross margin, with leverage available up to 100x. In this case, the platform will regard the entire deposit as margin, to try and prevent liquidation.

Example: You bought contracts with 10x leverage and opted for cross margin. This means that you have 10% more contracts than you would without leverage.

Comparing Liquidation Prices of BTCUSD and BTCUSDT

The liquidation price of linear BTCUSDT contracts for long positions is lower than that of BTCUSD contracts.

We purchased 0.05 BTC positions with 10x leverage in inverse BTCUSD and BTCUSDT. For the inverse contract, liquidation will occur at $7,024; for the USDT contract, at $6,953.

If Bitcoin drops to $7,000, the platform will liquidate the BTCUSD position, but not the BTCUSDT. This happens because of different currencies in the margin. In an inverse BTCUSD contract, the margin value drops along with the Bitcoin price. It doesn’t change in BTCUSD.

Liquidation prices of BTCUSD and BTCUSDT are 1% different with 10x leverage

USDT contracts offer lower volatility and lower liquidation risks during sharp price turns.

We’ve compared the ATR values for inverse BTCUSD and perpetual BTCUSDT. The chart shows the average price change for the last 14 bars. For a 4-hour period, BTCUSD volatility amounted to $169, while for BTCUSDT it was $162.

ATR(14) on 4-hour chart, BTCUSDT volatility is 0.4% lower

The difference in volatility between contracts is there because of the imperfect pegging of the Tether price to USDT, as well as the liquidity of USDT and USD markets on Bybit.

Trading BTCUSDT on Bybit: Pros and Cons

The main advantage of USDT contracts is the interface. The chart screen has dedicated buttons for placing orders and users can trade in fullscreen mode.

Bybit has also introduced additional mechanics for USDT contracts:

Simultaneous short and long positions that work for hedging and breakout trading
Unrealized profit can be used to open new positions.

Long and short positions, the trading interface can be seen at the top

On the downside, the order book has a maximum increment of $1, you can’t see major distant orders and determine support and resistance levels based on limit orders.

The order book depth can be set at 0.5 or 1

Traders can test out Bybit for free by registering and claiming their welcome bonus.

Conclusion

Cryptocurrency derivatives gradually gain steam thanks to their flexibility, such as the perpetual contacts on offer as explored in this article. They can be traded with leverage with a small deposit.

There are two kinds of perpetual contracts available on Bybit: inverse and linear contracts. USDT contracts are potentially more profitable in the long-run as they have lower volatility and liquidation risks. With a cross-margin, they can be purchased for long periods of time with low liquidation risks.

However, be warned: people have lost their deposits even without leverage. Use stop-orders, be wary with your leverage, and never invest money you can’t afford to lose. If you trade, trade smart.

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Tags: cryptocurrencies, derivatives, exchanges