Margin and Leverage on the Digitex Futures Exchange — 13th August 2018
The Digitex Futures Exchange will give traders the ability to trade with up to 100x leverage. This means that you can use your trading bank to buy and sell assets that are worth 100 times more than the amount you are trading with..
One of the major benefits of trading futures instead of buying and selling the physical underlying asset is the ability to use leverage. Instead of having to cover the full value of the underlying asset you are buying or selling, leverage allows you to do the same trade with much less money because you only need to put down what you could potentially lose on the position.
Leverage is possible because futures contracts are a promise to buy or sell the underlying instrument at a set date in the future, which means you don’t need to pay in full yet. To enter a futures position you only need to put down your potential loss on the position, which is much smaller than the full value of the underlying asset.
Being able to trade the underlying asset with a fraction of the money you would need to physically buy and sell the underlying asset makes futures trading very attractive to speculative trading because your profits can be very high relative to the amount of money you put down. With high leverage, traders can double (or lose entirely!) their account balance with one trade on a volatile futures contract like BTC/USD.
The Digitex Futures Exchange will give traders the ability to trade with up to 100x leverage. This means that you can use your trading bank to buy and sell assets that are worth 100 times more than the amount you are trading with. Traders can set their desired Leverage Rate on each futures contract by using a simple slider that goes between 1x up to 100x.
You set your desired Leverage Rate separately for each futures contract. Whatever Leverage Rate you select on the slider applies globally to all your current unmatched orders and to your current open position on that futures contract.
The amount of money that you put down to cover your potential loss when trading with leverage is called Margin. Traders must post sufficient Margin to cover each trade they enter. All Margin requirements on Digitex are payable in DGTX tokens. There are 2 different types of Margin: Initial Margin and Maintenance Margin.
Initial Margin
Initial Margin is the amount of money (payable in DGTX tokens) you must post to open a futures position.
Maintenance Margin
Maintenance Margin is 50% of the Initial Margin and is the amount of money (in DGTX tokens) you must have remaining from your Initial Margin to keep a position open. If the amount you posted goes below the Maintenance Margin requirement then your position is liquidated.
Initial Margin requirements are calculated by dividing the value of the futures contract by your Leverage Rate. The value of the futures contract is calculated using the following parameters:
BTC/USD futures price: $10,000
BTC/USD futures contract Tick Size: $5
BTC/USD futures contract Tick Value: 1 DGTX
In the above example the price of 1 Bitcoin is worth $10,000 but that is not the value of the BTC/USD futures contract. The value of the contract is calculated by dividing the futures price by the Tick Size and that gives you the number of Ticks. A Tick is the minimum price increment the BTC/USD futures contract can move. Each Tick is worth 1 DGTX token so in the above example the value of the BTC/USD futures contract is 2000 DGTX tokens:
($10000 / $5) = 2000 Ticks
2000 Ticks x 1 DGTX = 2000 DGTX
When the BTC/USD futures price is $10,000 the value of 1 futures contract on Digitex is 2000 DGTX tokens. This means that if leverage didn’t exist you would need to have 2000 DGTX to buy or sell 1 BTC/USD futures contract. It is now simple to calculate how much Initial Margin you must post to buy or sell 1 BTC/USD futures contract on Digitex at different Leverage Rates:
Using the above figures here are some example trades:
Leverage Rate 5x
- Trader buys 1 BTC/USD futures contract @ $10000
- Trader posts 400 DGTX tokens as Initial Margin from his trading account balance
- Trader position will be liquidated if his Margin drops below Maintenance Margin level of 200 DGTX which will happen if the price drops by 200 Ticks
- Tick Size is $5 so a 200 Tick movement is the equivalent of $5 x 200 = $1000 price movement on the BTC/USD futures contract.
- Therefore, if the BTC/USD price goes down to $9000 the trader’s position will be liquidated by the exchange.
Leverage Rate 10x
- Trader buys 1 BTC/USD futures contract @ $10000
- Trader posts 200 DGTX tokens as Initial Margin from his trading account balance
- Trader position will be liquidated if his Margin drops below Maintenance Margin level of 100 DGTX which will happen if the price drops by 100 Ticks
- Tick Size is $5 so a 100 Tick movement is the equivalent of $5 x 100 = $500 price movement on the BTC/USD futures contract.
- Therefore, if the BTC/USD price goes down to $9500 the trader’s position will be liquidated by the exchange.
Leverage Rate 20x
- Trader buys 1 BTC/USD futures contract @ $10000
- Trader posts 100 DGTX tokens as Initial Margin from his trading account balance
- Trader position will be liquidated if his Margin drops below Maintenance Margin level of 50 DGTX which will happen if the price drops by 50 Ticks
- Tick Size is $5 so a 50 Tick movement is the equivalent of $5 x 50 = $250 price movement on the BTC/USD futures contract.
- Therefore, if the BTC/USD price goes down to $9750 the trader’s position will be liquidated by the exchange.
Leverage Rate 50x
- Trader buys 1 BTC/USD futures contract @ $10000
- Trader posts 40 DGTX tokens as Initial Margin from his trading account balance
- Trader position will be liquidated if his Margin drops below Maintenance Margin level of 20 DGTX which will happen if the price drops by 20 Ticks
- Tick Size is $5 so a 20 Tick movement is the equivalent of $5 x 20 = $100 price movement on the BTC/USD futures contract.
- Therefore, if the BTC/USD price goes down to $9900 the trader’s position will be liquidated by the exchange.
Leverage Rate 100x
- Trader buys 1 BTC/USD futures contract @ $10000
- Trader posts 20 DGTX tokens as Initial Margin from his trading account balance
- Trader position will be liquidated if his Margin drops below Maintenance Margin level of 10 DGTX which will happen if the price drops by 10 Ticks
- Tick Size is $5 so a 10 Tick movement is the equivalent of $5 x 10 = $50 price movement on the BTC/USD futures contract.
- Therefore, if the BTC/USD price goes down to $9950 the trader’s position will be liquidated by the exchange.
The higher the Leverage Rate, the less Initial Margin the trader must post to buy or sell 1 BTC/USD futures contract. As you can see, posting less Margin magnifies the effects of small price movements in the underlying asset, meaning the trader can make very large profits (and have large losses) in relation to the amount of Margin he posted.
The value of futures contracts on the Digitex Futures Exchange can be denominated in DGTX tokens because our contracts are cash settled, meaning there is no physical delivery of the underlying instrument when each each futures contract expires at the end of the month. Each Tick ($5 price movement on price of Bitcoin) is simply worth 1 DGTX token.
On the Digitex Futures Exchange you are trading on the price of Bitcoin against the US dollar but your Margin must be posted in DGTX tokens and your profits and losses are in DGTX tokens. This is why we must first calculate the contract’s value in DGTX tokens so we can divide that amount by the Leverage Rate to give us the amount of Initial Margin that must be posted to enter a trade.
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