BTCMEX — a crypto derivatives exchange focused on Bitcoin ecology — explains the Dual-Price Mechanism — one of the reasons to trust the innovations in trading.
Inflated trading volume and pump-and-dump schemes are the market manipulations that are illegal in traditional finance, but common in crypto industry due to lack of regulations and untraceability. As a result of market manipulations on several famous crypto exchanges, the Last Traded Price (spot price) deviated significantly from the Index Price (market price), which caused many unreasonable Liquidations.
Standing at the forefront of innovations, BTCMEX uses the Dual-Price Mechanism during Liquidation to overcome possible problems and provide a fair and transparent Bitcoin Perpetual Contracts trading environment.
A Dual-Price Mechanism is a measure used by cryptocurrencies exchanges to avoid wrongful Liquidations due to price movements caused by actions of whales — holders of big assets on the exchanges.
The Dual-Price Mechanism is based on:
Mark Price — the average market price (Index Price) + a decaying Funding Basis.
Last Traded Price — the internal price on the exchange.
The Index Price is derived from the average BTC/USD price index of major exchanges. On BTCMEX it is calculated equally from three exchanges Kraken, Coinbase, and Bitstamp (33.33% each).
The Mark Price on BTCMEX is calculated as:
Mark Price = Index Price x (1 + Funding Basis)
Funding here refers to the periodic interest payments between traders which aim to keep the Last Traded Price on BTCMEX as close to the global Bitcoin price index as possible.
The Last Traded Price is the current Perpetual Contracts’ underlying price on the exchange.
The Dual-Price Mechanism kicks in during Liquidation — an automatic closing of the position due to a significant Margin loss. On BTCMEX Liquidation is triggered by the Mark Price, which means the exchange simply doesn’t have the power to manipulate the market! Meanwhile, the liquidated position will be closed at the Last Traded Price. You can learn more about Liquidation here.
BTCMEX uses the Dual-Price Mechanism to protect the users from market manipulations and avoid the risk of traders’ positions being liquidated due to actions of the heavyweight players who can move the market. At the same time, Funding is used to make sure the Last Traded Price doesn’t deviate significantly from the BTC/USD Index Price.
These measures make BTCMEX a secure, trusted and innovative cryptocurrency derivatives exchange platform. Find out more about Bitcoin Perpetual Contracts here.
Liquidation: An automatic closing of the position due to a significant Margin loss.
Dual-Price Mechanism: A condition when Liquidation is triggered by an average market price and not the Last Traded Price of the exchange.
Index Price: The average price index of a cryptocurrency on major exchanges.
Mark Price: The average market price (Index Price) + a decaying Funding Basis.
Last Traded Price: The price index of a cryptocurrency on the exchange.
Funding: The periodic interest payments between traders which aim to keep the Last Traded Price as close to the Index Price as possible.
