A Quick Starter Guide to Leveraged Trading at BitMEX
Intro: Using BitMEX in Falling Crypto markets
BitMEX provides a means to turn collapsing markets into a profitable trading opportuntity. Anyone who fails to learn how to use BitMEX is limiting their opportunities in crypto trading: They are denying themselves the ability to trade Short and profit from bear markets. Bitcoin and Altcoins are in a severe down-cycle at the time of writing (8 March 2018) — in Q1 2018 the global crypto market is 33% down Year to Date. And Altcoins went through a long Altcoin Winter July — October 2017 when Alts lost 80% of their value against BTC.
As an example, this Short trade made me a 500% profit at BitMEX in the Bitcoin panic on 7 March 2018, the day of the Binance API hack:
Buy 1 Bitcoin with 0.1 Bitcoin Initial Margin: Example of 10x Leverage
Let’s start with an example of a Long as it is easier to understand. You can buy 1 Bitcoin ($11,670 at time of screenshot) with 0.1 BTC ($1,167) by buying a 10x margin position at BitMEX. You can also short the Bitcoin price (profit from a fall in its price) by Selling the Contract. You might assign a small fraction of your portfolio to this high-risk high-reward form of trading. Note that you can lose what you stake.
Here is a video tutorial on trading Bitcoin with leverage.
Set-up to buy 1 Bitcoin ($11,670) with 0.1 BTC ($1,167) Margin i.e. 10x Leverage Long
(Ignore the data in the Your Position box for a trade I took before taking the screenshot.)
This is the set-up for 10x Leveraged Long. You can increase your leverage as you gain competence. E.g. Use 100x leverage to buy 1 Bitcoin at $11,670 with 0.01 BTC, or $116. 100x leverage is gambling, likely to make a lot of money or get wiped out in minutes. But it can be profitable if used strategically during wild bull or bear runs in the XBTUSD market.
The Place Order Box (top-left box)
Quantity: The quantity of the trade is $11,670. This is your position. But the money you place at risk is less than this, depending on what leverage you choose.
Cost: The cost is 0.1015 BTC i.e. $1,167. This is the maximum you can lose. You lose the entire amount should the price fall by 10% from $11,670 to $10,500. If the price was to crash to $5,000 your loss is still limited to $1,167 which is the value of your Initial Margin.
Order Value: The value of your position is 1 BTC i.e. $11,670. (0.9889 BTC to be exact.)
Available Balance: This is how much you have available for trading. Cost must be lower than Available Balance to execute the trade.
Profit Scenarios with 10 x Leverage Long
Note that your profit can exceed 100%, indeed it is unlimited, but your loss is limited to 100%, however much the market falls.
Profit Scenarios with 10 x Leverage Short
Again, as with the Long, your profit can exceed 100% by orders of magnitude. (Profit is theoretically unlimited with Longs, but there is a limit with Shorts which is the profit when the price has fallen by 100%, as the price cannot fall further and become negative.) Your loss is limited to 100%, however much the market rises.
This asymmetry (unlimited profit, limited losses) is the beauty of the BitMEX Limited Risk contract, which is a BitMEX innovation. Trading Futures Contracts on the CME or CBOT, for example, there is no such limited risk facility. With standard futures contracts the Exchange will Margin Call the client for Maintenance Margin to supplement his Initial Margin when the price approaches the Bankruptcy Price, and you can lose a lot more than your Initial Margin. So you would get a Profit/Loss Scenario like this for a Long:
The mechanics of the BitMEX solution involve setting a so-called Liquidation Price a fraction above the Bankruptcy Price (in the case of Longs) or a fraction below the Bankruptcy Price (Shorts). When the market moves adversely against your position and approaches the Bankruptcy Price, the Liquidation Engine takes over your position and liquidates it automatically at market. It add any tiny profit made by the Exchange to the Insurance Fund, or deducts any loss made from the Fund.
Selecting Your Leverage
These tables shows the leverage level and the adverse change in price that will result in Liquidation. The greater the leverage the smaller the adverse change in price that will cause a Liquidation.
Long: Liquidation price < Entry Price
Short: Liquidation price > Entry Price
The above tables show that Shorting is safer than going Long, in that a larger percentage change (and USD change) is required to cause Liquidation when you go Short than when you go Long, for a given level of Leverage.
The above tables also show that even with the minimum 1x Leverage there is a small but real risk of Liquidation when Long. But there is no risk of Liquidation when 1x Short.
Your First Trade: Long BTC with $50 and 2x Leverage
Trade with tiny amounts to start with to become familiar with the BitMEX site. Then you can increase your leverage as you gain competence. E.g. you might open a safe position of $100 at 2x Leverage which means your Cost is $50. This $50 trade is illustrated:
The most you can lose is the Cost: 0.005 BTC = $50. You lose that if the market price falls 33% to the Liquidation price of $6,693.
When you press Buy Market, this confirmation screen pops up. Your order is not placed until you confirm Buy in this screen.
I suggest these practices in making your first few trades, to be on the safe side.
- Deposit a small amount into your BitMEX account so that even if you screw up you know the most you can lose. Maybe 0.05 BTC?
- Concentrate on one market and become familiar with it. I suggest the XBTUSD Perpetual Swap which is the most heavily traded. Staring out, ignore all other markets, the Altcoin markets and the Bitcoin Futures.
- Set the leverage at 2x, 3x or a maximum 5x using the Leverage Slider Bar. Don’t set too high a leverage or you might get liquidated quickly and get stressed. n.b. Do not select Cross on the Leverage Slider Bar. This exposes your whole equity balance and is risky.
- Setting up your first trade, the field to pay particular attention to is Cost. This shows the maximum that you can lose. The cost must be less than the Available Balance.
- This heuristic is perhaps more profit maximisation than risk management, but here it is: use Limit Orders not Market Orders.
Watch the Market : BitmexRekt Explained
When trading on leverage you do of course need to keep a close eye on the market. Rather than staying glued to BitMex all day, which is impractical, the Twitter account @BitmexRekt is useful for keeping an eye on the market.
Take this Tweet as an example:
This Tweet indicates the XBTUSD market has experienced a sudden drop. (If the Tweet says ‘Liquidated Short on XBTUSD: Buy …’ then the market has risen quickly .)
When a Long position is liquidated it means the price has fallen and the trader has run out of the margin required to keep the position open. The BitMEX Liquidation Engine then takes over the position and closes it by Selling 495,600 contracts at the market price.
1 XBTUSD contract = 1 USD on BitMEX. (Other Futures contracts on BitMEX have different contract sizes. E.g. the contract size of the ETH Futures Contract is 1 ETH, or about $800 at time of writing.) So the trader who got liquidated for 495,600 Contracts lost a position of $495,600. They do not, however, lose $495,600. The amount of their losses depends on the leverage they were using. The greater the leverage, the smaller the loss. With the maximum 100x leverage the loss is 0.5212 Bitcoin, about $5,700 or 1.15% of the $495,600 position.
A. Copy Skilled Traders on Twitter
B. Buy the Dip with Limit Orders
C. Semi-Permanent Long Position
D. Trade the Mayer Multiple
E. Trade Altcoins
F. Exit all the Crypto Markets FAST
G. Earn Interest Income
A. Copy Skilled Traders
A few traders on Twitter to Follow:
AngeloBTC , CarpeNoctom , @cryptoSqueeze , @mBTCPizpie , @IamNomad, @ThinkingUSD, @LightCrypto
B. Buy the Dip with Limit Orders(Bull market) or Sell the Spike (Bear market)
My general rule in buying Bitcoin on leverage is to buy the dip when the market of going through a prolonged bull period: you want to see red candles after a period of green candles on the charts. One way to ensure you are buying a dip is to place a Limit Buy Order at a Limit Price some way below the current market price. Your order will only get triggered if there is a dip. You might leave that order in place for days, weeks even. There is no obligation to trade immediately.
I like to buy at 5x leverage to start with. If the position trades into a nice profit I slide the leverage slider up progressively to 10x, 25x, 50x and 100x. This has the effect of moving your Liquidation Price up and Realising some profit. So even of you get Liquidated eventually, you have already Realised good profit that is unaffected by the Liquidation.
C. Semi-Permanent Long Position
Another strategy I use is to keep a 3x leveraged long position on Bitcoin permanently open on BitMEX in an established bull market. When the market rises then take profit off the table. Using the XBTUSD Perpetual Swap contract there will be a daily funding cost to pay, but this can be avoided using the Bitcoin Futures Contracts.
D. Trade the Mayer Multiple
Mayer Multiple = Bitcoin Price / 200-day Moving Average.
The simple trading idea is to trade Bitcoin on low leverage when the Mayer Multiple is out of whack — buy when it is too low, and sell when it is too high. This is a medium- to long-term trade. Hold your position until the Mayer Multiple has reverted to its mean.
Rules of thumb:
Go long on the XBTUSD Perpetual Swap when Mayer Multiple less than its Mean, and is in the Green Zone, i.e. < 1.5
Go short on the XBTUSD Perpetual Swap when Mayer Multiple is in Amber or Red Zone, i.e. > 3.9
Green Zone (Go Long!):
Yellow, Amber and Red Zones (Go Short!):
This rule of thumb worked well in the euphoric period in December 2017, when the historically high Mayer Multiple was signalling go Short:
And it worked well in the period of despair in early February 2018, when the Mayer Multiple was signalling go Long:
There is a useful Twitter bot that publishes daily calculation of the Mayer Multiple:
E. AltCoin Futures Trading
Margin-trading at BitMEX is available on most of the Top 10: Bitcoin, Ethereum, Bitcoin Cash, Ripple, NEO, Dash, Litecoin, Ethereum Classic, Monero, ZCash, Cardano, Stellar. Note that the BTC trade is priced against the USD, but these Altcoin contracts are priced against Bitcoin.
Futures trading is of value when you identify an Alt that is in a downward trend or even a death spiral, in which event you can profit by shorting it against BTC at Bitmex. Look at XRPBTC slowly sink by 90% from 21,000 Satoshis to 2,210 Sats over the period 18 May 2017 to 3 December 2017.
Also, the day might come when the crypto market goes into a prolonged period of decline. Like DotCom in the Spring of 2000. If you are skilled at trading on margin you can use that as an opportunity for gain by shorting the ALTBTC markets and the BTCUSD markets.
F. Exit all the Crypto Markets FAST
Long Synthetic USD = Long Physical Bitcoin + Short XBTUSD Swap
There are times you might want to eliminate your cryptoasset exposure immediately and get into fiat like the Dollar. Many of us were in this position in mid-January 2018 when it was time to lock in profits as the crash was just setting it. The ordinary method is to sell Crypto for Tether (at Crypto-Tether Exchanges like Binance, Bittrex, Bitfinex, Poloniex) or for USD (at fiat-crypto exchanges like Kraken, Gemini, Bitstamp). There may be good reasons those options are not attractive — you do not trust Tether or you do not want to run a large cash balance at the US exchanges with the IRS keeping a close watch.
The solution is to sell all your Cryptos for Bitcoin, move that Bitcoin to BitMEX, and do a x1 Short on the Bitcoin Swap matching the value of your Bitcoin holdings. You then hold a 100% synthetic USD position.
You are effectively 100% in USD. So If Bitcoin rises you make a loss measured in Bitcoin— as you would owning USD — and if it falls you make a profit measured in Bitcoin — again, as you would owning USD.
Note that you are not at risk of Liquidation with a 1x Short, as illustrated here. The Liquidation Price is over $2 million. Further note that Bitmex has best practice security standards with its use of Cold Wallets and its manual verification of all withdrawals. BitMEX has never been hacked. Trade this on the Bitcoin Swap contract, not on the Futures Contracts, so you are likely to earn interest from your Short. (Explained in next section.)
G. Earn Interest Income
Earning interest income at BitMEX can be highly profitable but it is not so straigforward as lending at Poloniex and Bitfinex. You earn interest by shorting the Bitcoin Swap contract on BitMEX. Shorting Bitcoin essentially means you are holding a USD position. It is a way to hedge your portfolio against Bitcoin price movements whilst earning interest.
How to earn interest from lending $10,000 on the Bitcoin Swap from Bitmex?
Step 1 Set-up a short position on XBTUSD. Select x1 Leverage
Step 2 You now effectively hold $10,000 on Bitmex and are lending it and will automatically receive interest on it.
The Funding Rate is displayed in the box bottom-left
If the rate is positive (as it nearly always is, particularly when sentiment is net bullish) then it is the rate that Longs pay Shorts.
The Funding History page confirms that the rate is positive (as we want it to be) most of the time.
Interest is paid every 8 hour period, so 3 times a day. At 4am UTC then at midday UTC and then at 8PM UTC.
When you are shorting Bitcoin your position (Unrealised PNL) will change according to price of Bitcoin, until you close your short, at which point you will turn it into a Realised PNL. But your interest payments will be realised (Realised PNL) every 8 hours and come into your account.
Whe you are comftable with shorting with 1x leverage, you can try 2x. Shorting on 2x allows you to keep some of your Bitcoin in cold storage, so you are exposed to less counterparty risk to BitMEX. Watch the market and add extra margin if the price rises close to your Liquidation price to avoid Liquidation.
More detail on this trade in this essay: XBTUSD The Philosopher’s Stone and Earning Interest Income on XBTUSD with Minimised Risk.