BitMex Trading Basics
BitMex is an exchange used for trading futures contracts. This article is an introduction to trading on BitMex. Feel free to use the trading platform to speculate on the price of bitcoin.
Those not into speculation may still find BitMex very valuable. For example, the platform could be used to execute a simple long hedge while waiting for funds to transfer from a bank account to a gateway exchange like Gemini or Coinbase. A BitMex long hedge can lock in a favorable fluctuation in the price of bitcoin for those looking to accumulate the cryptocurrency over time.
Account Opening
Establishing an account on BitMex is straight forward. Only an email address is required to open the account. There are no AML/KYC checks. Consequently, government and other official identification documents are not required to open the account. When prompted, provide a real name or fabricate one. BitMex truly does not care.
Feel free to use this affiliate link to open the account. Use the link to receive a 10% discount on trading fees for the next 6 months. [1]
BitMex will send an email to the address submitted to verify that the email address entered is valid.
After opening the account with a real (or fictitious) name, a valid email address, and secure password, be sure to set up two-factor authentication (2FA) if planning to significant amounts. BitMex works with Google Authenticator and Yubikey.
Note: BitMex is not available in the United States of America.
Account Funding
An account must be funded with at least $1 worth of bitcoin before it can be used to trade. BitMex only works with bitcoin. Even though cryptocurrency prices are quoted in US dollars, it is not accepted on the platform. BitMex cannot be used to acquire bitcoin. BitMex traders must already have some bitcoin in their possession to fund the account.
Weird, huh? With the passage of time it will seem less weird. Follow these steps to fund the account:
- Log in to the account with the email address, secure password, and optional 2FA credential.
- Click on Account on the top menu bar.
- Navigate to the Wallet section and click on Deposit.
- Send BTC to the QR code or multisignature bitcoin address provided.
- Wait ~20 minutes for the transfer to be acknowledged and credited.
Note: BitMex uses the symbols XBT for bitcoin. It is exactly the same as BTC.
In order to be able to trade at anytime the XBT market moves favorably, and to avoid the ~20-minute funding delay, try to maintain a reasonable XBT balance in the exchange wallet. In determining what is reasonable, please bear in mind that cryptocurrency exchanges are constantly under attack. Many have been successfully hacked. BitMex claims to use cold storage. Who knows? Better to play it safe.
Trading is possible once the account is established and funded. However, the BitMex interface for trading is a little more intimidating than the one found on Coinbase.
Apart from the nomenclature, there are some concepts that must be thoroughly understood before trading. Most folks tend to focus on leverage and margin when initially exploring BitMex.
Indeed, leverage is the reason most people use BitMex. Before discussing leverage and margin, it is important to understand what a futures contract is. While many traders flock to BitMex to acquire the ability to leverage bitcoin trades, people tend to overlook what BitMex is actually offering.
Futures Contracts
Futures contracts are essentially bets on the future state of something. These things are typically commodities, like pork bellies. Yummy!
On exchanges like BitMex, futures contracts are bets on the future value of very liquid cryptocurrencies. XBT, ADA, BCH, EOS, ETH, LTC, TRX, and XRP are very liquid cryptocurrencies. Bitcoin is the most liquid cryptocurrency. It is the cryptocurrency most widely held and traded. It is also the cryptocurrency that this article is really focused on.
Futures contracts derive their value from the underlying cryptocurrency (or underlying asset). Futures contracts are, therefore, derivative financial instruments, or derivatives. They could not exist without the underlying asset. For example, bitcoin derivates cannot exist without bitcoin. Bitcoin is the underlying asset of bitcoin futures contracts.
Futures contracts are technically liabilities. They represent obligations to buy or sell an asset (like bitcoin or pork bellies). Traditionally, this asset is delivered on settlement when the futures contract expires. Read on to learn more about the terms in bold.
Contract Settlement
All futures contract must be settled at the expiration of the contract. Futures contracts are either physically settled or cash settled.
Traditionally, futures contracts are physically settled. The buyer has the obligation to take physical delivery of the underlying asset from the seller. The seller has the obligation to make physically deliver the underlying asset to the buyer. This exchange happens on contract settlement.
If the underlying asset was XBT, for example, then the seller would be responsible for delivering actual bitcoin to the buyer for the price specified in the futures contract. Fortunately, this is trivial. If the underlying asset was a large number of pork bellies, the seller would have to find a way to physically deliver that bounty to the buyer. Good luck with that! Maybe FedEx will help.
BitMex futures contracts are cash settled. Cash settlement is typically much easier than physical settlement. In the case of pork bellies, cash settlement is definitely a less smelly affair.
The amount to be settled is the difference between the spot price (the real price of the underlying asset at expiration) and futures price (the price specified in the futures contract).
Contract Expiration
BitMex offers perpetual contracts. Perpetual contracts are a type futures contract that do not expire[2]. According to BitMex,
Perpetual contracts mimic a margin-based spot market.
This is why most traders gloss over the intricacies of futures contracts.
Although perpetual contracts are the most popular contracts on BitMex, there are other types of futures contracts. These contracts are more “traditional” in the sense that they expire. Traditionally, futures contracts expire because the contract is an agreement to buy or sell the underlying asset at a specific date in the future at a specific price.
Some BitMex futures contracts expire in March, June, September, and December. The futures months codes for those months are H, M, U, and Z. They follow an industry standard. So an ADA contract that expires in 2019 on March 29th has a symbol of ADAH19.
Traditionally, most futures contracts are not held until expiration. That is because most traders are feverishly speculating on the fluctuation in price after entering a long or short position. Consequently, there is a big drop in volume as traditional futures contracts near expiration. Only the traders that truly want to buy or sell the underlying asset hold their long or short positions until contract expiration.
Note: This introduction to trading on BitMex is focused on XBTUSD bitcoin perpetual contracts only (see next section).
Contract Specification
Bitcoin perpetual contracts are symbolized as XBTUSD contracts on BitMex. The symbols indicate that the underlying asset is bitcoin (XBT) and that the price of the asset is quoted in US dollars (USD).
Perpetual contracts, like other futures contracts, are standardized to make them highly liquid. Essentially, one XBTUSD contract is one US dollar’s worth of bitcoin. This is known as the face value of XBTUSD. On BitMex, all perpetual contracts are denominated in US dollars. That is ironical as the platform bans traders based in the United States. [3]
Note: Acquiring a bitcoin futures contract (i.e. XBTUSD) is not the same as acquiring bitcoin (aka XBT or BTC). XBTUSD is not XBT. XBTUSD has no private key. It is not a cryptocurrency. XBTUSD is a bitcoin futures contract. It is an agreement to buy or sell XBT at a specific price at a specified time.
Contract Positions
There are essentially two positions that traders can assume on futures. Traders can go long or they can go short. Either they assume price is going up and take a “long position” to buy the underlying asset at a specified future date. Or they assume that price is going down and take a “short position” to sell the underlying asset at a specified future date.
Futures contracts are simply agreements (obligations). Consequently, traders do not need to physically possess the underlying asset to take a short position. Future contracts make it possible for traders to take a position on assets that they do not own as long as they offset that position before the expiration of the contract.
Contract Offsetting
To profit from an open long (buy) position, the trader may open an offsetting short (sell) position before the expiration of the contract. This is the equivalent of buying low and selling high. Makes sense right?
The opposite is also true. If the trader has a short contract and wants to profit from a beneficial fluctuation in price, they may go long in an offsetting contract. This is the equivalent of selling high and buying low. This seems illogical and impossible. Yet it is possible. It is possible because futures contracts are standardized obligations. A trader can commit to sell the underlying asset, even if they do not actually possess it, and later commit to buying back the same asset. It does not matter (“have any impact”) since offsetting is performed before the expiration of the contract.
Margin
Before speculators can make bets on future prices, BitMex requires traders to make a deposit. That deposit is called the margin. BitMex calls it the initial margin. It is the collateral that protects BitMex when a trader is suffering a significant loss from an adverse fluctuation in the price of the underlying asset.
BitMex uses the margin to ensure that the trader does not default on their contractual obligation. When BitMex uses the margin to cover a trader’s losses it is referred to as a liquidation. Try to avoid liquidation.
A maintenance margin is required after a contract position has been established. The maintenance margin is the minimum amount of funding a trader must have on deposit to maintain an open contract position.
Leverage
A trader is trading with leverage whenever their contract position is larger than their margin. BitMex allows futures traders to enter long or short positions that are multiples of the amount that they have on deposit in their account. That multiple can be as large as 100. This is known as 100x leverage.
Note: Be sure to review the definitions of contract position and margin if that last paragraph makes no sense.
Cross Margin
BitMex created a special type of leveraged trading for gamblers (eh em… traders) that have an affinity for 100x leverage. It is known as cross margin (or spread margin) leverage. A trader may commit the entire amount that they have available on deposit to ensure they do not default on their obligation whenever there are adverse price fluctuations on a 100x leveraged contract position.
Depending on the amount on deposit, cross margin leverage allows these ravenous speculators to hold on to their highly leveraged bet whenever an adverse price fluctuation would have triggered a liquidation event.
The default setting for leverage on BitMex is cross margin (or cross). That might make some traders reflect for a moment. They might ask themselves: What exactly does the default setting encourage?
Isolated Margin
The alternative to cross margin is isolated margin. Isolated margin allows a trader to limit the margin that could be liquidated in the event that the market moves against them.
Note: BitMex will liquidate a trader’s contract position even if the position is less than margin. BitMex will liquidate a position at 1x leverage if the market moves more than ~50% against it.
Longing and Shorting Bitcoin Perpetual Contracts
Traders must place an order to BitMex to take a long or short position on XBTUSD perpetual contracts. There are basically two types of orders: market orders and limit orders.
Market Orders
Market orders are executed at the market price. The market price is a constantly changing price. Essentially, the price is constantly changing because BitMex has a book (or order book) full of orders placed by other traders and is incessantly matching them.
Matching is performed by a matching engine. This order matching engine is not really an engine though. It is a bunch of computers running special code.
To place a market order:
- Navigate to the Place Order menu.
- Click on the Market tab.
- Enter the quantity of XBTUSD perpetual futures contracts to either long or short.
- Click on either the “Buy Market” or “Sell Market” button.
Note: Traders are forced to take the market price if they want their order executed immediately. Market orders take liquidity.
Limit Orders
Limit orders are executed when the market price crosses a specific threshold called the limit price. The limit price is specified by the trader. It is their reservation price. It is the most they will pay to go long on a perpetual contract or the least they will pay to go short.
To make a limit order:
- Navigate to the Place Order menu.
- Click on the Limit tab.
- Enter the quantity of XBTUSD perpetual futures contracts to either long or short.
- Enter a limit price for XBT in USD.
- Be sure to click Post-Only.
- Click on either the “Buy/Long” or “Sell/Short” button.
Note: BitMex gives rewards to traders that place limit orders. Limit orders make liquidity. Try to place limit orders as often as possible.
[1] After establishing an account, share the affiliate link provided to extend benefits to friends, family, and other persons that need BitMex for a long hedge. Sharing benefits not only them but also the affiliate.
Affiliates receive a percentage of total commissions paid by the people establishing accounts through the affiliate link. This percentage is paid in Bitcoin and deposited to the affiliate’s BitMEX wallet.
Each referral generates affiliate commissions for the lifetime of the account. The greater the number of referral opening accounts and the more those referrals transact, the greater the commission BitMex shares with the affiliate. Click here to learn more about the BitMex affiliate program.
[2] Technically, perpetual contracts on BitMex do expire. They expire every 8 hours.
[3] Touché, USD is the world’s reserve currency.
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