Leverage element allures ETH/USD speculators via Quanto derivatives

We’ve covered BitMEX announcement of the launch of two derivatives products, namely, ETHUSD perpetual swaps and UPs & DOWNs to meet market demand amid the crypto market downturn which began after the news of the US Securities and Exchange Commission’s (SEC) delayed decision on an ETF product approval.

While hedging a quanto perpetual derivatives are not straightforward. The appended element of correlation risk between two crypto assets complicates things. Speculators care about obtaining exposure to risk. How they get that exposure if they can get in and out cheaply is secondary. If BitMEX is able to create a liquid market for Bitcoin quanto’ed derivatives, speculators will flock to them.

As we’ve already explained in our recent post as to why do we rely on Quanto style, in order for BitMEX to offer ETHUSD risk, we had to quanto into Bitcoin. This write-up will explore and emphasize on the concepts speculators ponder upon.

The following assumptions are considered for all the below scenarios:

Contract: ETHUSD
Multiplier: 0.000001 XBT per 1 USD
Contracts: 10,000

The most significant aspect to a speculator is the contract’s payoff function. Since the speculation on the ETHUSD price is now considered, ideally the contract’s Bitcoin value should increase and decrease in a linear fashion with respect to the ETHUSD price.

If the speculator denominates their profit in Bitcoin (XBT) terms. Therefore, the value of Bitcoin in USD terms at a particular ETHUSD price is irrelevant. Put simply, the speculator wants to use Bitcoin as a margin to earn more Bitcoin.

The above chart illustrates that at different ETHUSD values, the XBT value of the position changes linearly. That is exactly what the speculator desires.

XBT Value = ETHUSD Price * Multiplier * Contracts

Calculating Margin

How is the amount of Bitcoin margin calculated? The initial margin for the ETHUSD contract is 2%, or 50x leverage.

Initial Margin (IM) = 2% * XBT Value

If you enter the trade at an ETHUSD Price of $500, this is your initial margin requirement:

IM = 2% * $500 * 0.000001 XBT * 10,000 = 0.10 XBT

The next important consideration is what is your liquidation price. That is determined by the maintenance margin. The maintenance margin for the ETHUSD contract is 1%. If the underlying ETHUSD spot price declines by 1%, you will be liquidated. Courtesy: BitMEX

Currency Strength Index: FxWirePro's hourly BTC spot index is inching towards -111 levels (which is bearish), while hourly USD spot index was at 61 (bullish) while articulating (at 11:58 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex