Understanding the BitMEX Insurance Fund

The BitMEX Insurance Fund, a safety net for margin traders, has seen quite a hefty increase of nearly 13,000 BTC throughout 2019, boosting its total to over 33,491 BTC by year-end. In the vast ocean of Bitcoin, this represents a mere 0.19% of the circulating supply. It’s like adding a fancy new yacht to a harbor filled with rowboats; impressive, but relative.

How Does This Fund Actually Work?

To put it simply, the fund acts as a cushion for crypto margin traders riding the high waves of leveraged trading, where bets go up to 100x! Here’s how it unfolds:

• Trader A: Wins a trade, banking off the rise in Bitcoin’s price.
• Trader B: Takes a hit, leaving the fund to smooth out the bumps.

Imagine Trader A expecting a solid $5,000 windfall from a mere $500 increase with 10x leverage, only to face a $1,000 deficit because Trader B’s loss didn’t cover it. It’s like winning a small lottery but realizing you left the other ticket at home!

Why the Fund is Ballooning

BitMEX has cultivated an environment of high liquidity, a crucial element in the crypto landscape. According to crypto analytics platform Skew, the tight bid/ask spread indicates a thriving market and ultimately nurtures the growth of the insurance fund. When trader liquidations happen at favorable prices, the fund naturally flourishes.

Key Developments in 2019

One of the remarkable patterns observed was the insurance fund’s growth during stable market conditions, especially when liquidations are executed efficiently. Key takeaways include:

• The fund is fed by executed liquidations.
• April 12, 2018, recorded the steepest drawdown of about $5.1 million in Bitcoin.
• Small fluctuations in fund balance are typical, yet overall growth persists.

Criticisms and Challenges

Despite substantial growth, BetMEX isn’t without its critics. Concerns regarding the transparency of the insurance fund are abundant. Some of the major criticisms include:

• Lack of detailed disclosures regarding trade variables.
• Missing breakdowns on drawdowns relative to each contract.
• Skepticism about the fund being treated as a balance sheet asset.

Peer exchanges highlight similar insurance funds as a step towards improving trader security. Deribit’s perspective suggests that aggressive liquidations could dissuade exploring alternative security solutions.

The Competitive Landscape

In the crypto derivatives arena, BitMEX’s insurance fund outshines its competitors. Other exchanges like Deribit, Huobi, and OKEx have their insurance mechanisms, but none come close to BitMEX’s current standing with just about $46.3 million in OKEx’s fund, for example. To borrow a phrase from competitive sports: the BitMEX fund is smashing goal records while its competitors are still warming up.