Introduction to Bybit’s Mutual Insurance

Mutual insurance is a risk management tool for perpetual contracts. Traders holding perpetual contract positions on Bybit can purchase mutual insurance to hedge the potential loss. Premium paid for mutual insurance will be credited to Mutual Insurance Fund. If the insured perpetual contract position experiences loss, the trader can receive compensation from Mutual Insurance Fund.

Long Protection and Short Protection

A trader with a long BTCUSD position can purchase long protection to hedge against potential downside risk.

A trader with a short BTCUSD position can purchase short protection to hedge against potential upside risk.

At present, Bybit’s mutual insurance only supports BTCUSD contracts and it’s presently only available on the PC web page.

Now for our next point let’s talk about how to Purchase Mutual Insurance and how it actually works.

To purchase, follow these steps.

Step 1: Click on Buy insurance as shown in the image.

Step 2: Select the % of the order you want to cover and the time period of the insurance, based on those factors, the insurance window will show you the premium of the insurance that you would have to pay.

Step 3: Once everything is up to your satisfaction click on “Confirm Purchase”

Upon doing that you will see your open order is insured. And your order will look like this.

So now the question arises: How does it benefit a regular trader? How is it better than SL or any other risk management tool?

To understand this easily, let me give you an example.
Let's take the images shared above as an example, in that image we can see that we have a long position of 10000 contacts from price $9447.49 and our liquidation price is $9400.50 while initial margin is $107.62

So any trader can understand here that if the price reaches to $9400.50 our position will get liquidated and we will lose all of our initial margin which is $107.62.

Now to avoid liquidation, what does a trader do? We have Stop Loss, which is the best available option according to most traders. Now in this scenario let’s assume we just do that.

As you can see in the image even if we have the stop loss at $9415 our estimated loss would be 0.00365269 BTC which is even higher than our insurance price in the first place, which you can see in our previous insurance image. Now, if you hit stop loss then it is a definite loss of 0.00365269 BTC and there is no going back on that. While with mutual insurance, even if you get liquidated within a given insurance time frame you will have your entire initial margin covered and you would have been in a much better position. So that is one of the many reasons why many investors believe that insurance is a better risk management tool than other tools like Stop Loss.

Note: This was just one of many scenarios of Bybit insurance use. Risk and reward ratio would always be different according to the contract size, initial margin, insurance period and so on. Always DYOR before jumping into any conclusion or placing any trades. For detailed information about Bybit’s Mutual Insurance, please visit — https://help.bybit.com/hc/en-us/articles/900000389743-Introduction-to-Mutual-Insurance

Now let's understand some technical details and important FAQs about Bybit Insurance.

• Insurance amount

Insurance amount refers to the value of a perpetual contract position to be insured. Traders can choose to purchase 25%/50%/75%/100% of the insurable amount per insurance order.

Examples: A trader holds 20,000 BTCUSD short contracts at $8,000, and decides to purchase 25% short protection. The corresponding insurance amount will be 5,000. Once purchasing this 5,000 insurance…

1. How to calculate insurance payoff?

Trader A short 20,000 BTCUSD position at $8,000 and the current market price rises to $10,000. The account suffered a loss:

Mutual insurance payoff calculation:

Short Protection Payoff = Insurance Amount * (1/Insured Price — 1/Settlement Price)

Long Protection Payoff = Insurance Amount * (1/Settlement Price — 1/Insured Price)

In this particular case:

20,000*(1/10000–1/8000)=-0.5 BTC

If trader A shorts 20,000 BTCUSD position at $8,000 and the current price of BTC has risen to $10,000.

This time, he purchased 20,000 short protection concurrently at $8000 index price. Trader A then chose to manually close the short protection. The index price at that time was $9,998.

Payoff: 20,000*(1/8000–1/9998)=0.49958BTC

2. What are the conditions to trigger payoff calculation?

The Insurance payoff will be payable if any of the following conditions below are met.

A. Insurance duration expired.

The duration (2 hours, 12 hours, 48 hours) selected by the trader has expired, payoff calculation will be triggered.

Examples:

Trader A longs 20,000 BTCUSD position at $8000 and purchase 20,000, 12 hours long protection concurrently at $8000 index price. When the insurance expires,

- if the settlement price is higher than $8000, there will be no payoff.

- If the settlement price is less than $8000, the system will calculate the payment calculation.

Assuming the settlement price is $7,000, the payoff is 20000*(1/7000–1/8000)=0.35714BTC

B. Manual settlement of insurance

Traders can choose to settle their insurance manually before the insurance expire.

Examples:

Trader A long 20,000 BTCUSD position at $8000 and purchase 20,000, 12 hours long protection concurrently at $8000 index price. If the trader manually closes the insurance at $7500 index price;

The payoff amount is 20000*(1/7500–1/8000)=0.1666BTC.

C. The insured BTCUSD position has been liquidated

When the insured BTCUSD position has been liquidated, all the corresponding insurance will be immediately liquidated and payoff calculation will be triggered.

Examples:

Trader A long 20,000 BTCUSD position at $8000, liquidation price of the position is $7500 and at the same time purchase 20,000 long protection at $8000 index price. When the mark price reaches $7,500, the insurance will trigger payoff calculation because the position has been completely liquidated.

Case 1:

If the index price at liquidation time is $7,510, the settlement price is $7,510, and the payoff is as follows:

20000*(1/7510–1/8000)=0.1631BTC

Case 2:

If the index price at liquidation time is $7,490, the settlement price is $7500 (max payoff) and the payoff calculation as follows:

20000*(1/7500–1/8000)=0.1666BTC

D. The insured BTCUSD position has been partially liquidated

The amount of insurance corresponding to the BTCUSD position being liquidated is immediately liquidated as well and payoff calculation will be triggered.

Examples:

The trader shorts 10,000 BTCUSD positions at a price of $5000. Liquidated price at $6000.

When the price rises to $6,000, a partial liquidation is triggered and 2000 positions were liquidated.

Situation 1:

The trader purchased 7000 short protection. After the liquidation of 2,000 BTCUSD positions, there are still 8000 BTCUSD positions left. As only 7,000 short protection was purchased, the liquidated 2,000 BTCUSD positions will not be given any payoff. However, the trader can choose to manually close the insurance at this time.

Situation 2:

Traders purchased 9000 short protection and 2000 BTCUSD position was liquidated. Of which 1,000 contracts will not be covered by insurance but the subsequent 1,000 will trigger 1,000 insurance payoff.

Please click here to find out more for the details when Partial liquidation occurs when the trader is holding on to multiple insurance entries.

For more FAQs please visit — https://help.bybit.com/hc/en-us/articles/900000392763-Mutual-Insurance-FAQ

That’s it for today, Stay tuned for next Bybit Talk. Don’t forget to join Bybit Official Telegram and Local communities! :)

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