BTC futures offer a versatile way to hedge against price swings or speculate on Bitcoin’s future price. This guide examines what BTC futures are, how leverage and funding work, and how the liquidation process (including bankruptcy price and insurance fund) helps maintain a stable trading environment.
What Are BTC Perpetual Futures?
A futures contract is an agreement to buy or sell a certain amount of Bitcoin at a predetermined price without an expiration date. They use a funding rate to keep the futures price close to the spot market price.
Index Price
Definition: A weighted average of every asset spot prices across various market prices.
Purpose: Helps ensure the perpetual futures price stays anchored to “real-world” assets values, in both parties, in the BTC price and the underlying asset.
Impact: If the futures price moves away significantly from the index price, the funding rate shifts to incentivize traders (longs or shorts) to bring futures back in line with the index.
Leverage & Margin
Leverage: Magnifies your buying (or selling) power. For example, 5× leverage means 0.2 BTC can control a 1 BTC futures position.
Margin Types:
Isolated Margin: Each position has its own allocated margin, so liquidation of one position does not affect the rest.
Cross Margin: All BTC in your trading wallet can support all open positions, reducing isolated liquidation risk but tying up more capital.
Today Roxom only works with Isolated Margin! Cross Margin is coming next!
Funding Rate
Mechanism: A periodic payment, every 8 hours, between traders.
If futures trade above the index price, longs pay shorts.
If futures trade below the index price, shorts pay longs.
Countdown: Most exchanges display a timer before the next funding event, letting traders plan around upcoming charges or credits.
Key Concepts & Clearing House 🚀
When trading with leverage, it's essential to understand how key concepts like maintenance margin, liquidation price, and bankruptcy price interact with Roxom’s clearing house and insurance fund. These mechanisms are designed to protect traders and maintain a stable trading environment. This are:
Maintenance Margin:
The minimum collateral requirement that must be maintained in your account. If your available margin falls below this threshold, your position may be liquidated.
Liquidation Price:
The approximate price of the pair (eg. SPX/BTC) at which the exchange forcefully closes your position to prevent negative balances.
Mitigation:
Strategies to reduce liquidation risk, such as lowering your leverage, adding more margin, or partially closing your position.
Bankruptcy Price:
A critical reference point for your position. For longs, it’s the BTC price below which your losses exceed your total allocated margin; for shorts, it’s the price above which this occurs. If the mark price (or liquidation execution price) goes past your bankruptcy price, your margin is fully consumed, potentially triggering the insurance fund to cover any shortfall.
Clearing House & Insurance Fund Functionality
Roxom’s clearing house continuously monitors isolated margin positions to ensure they maintain sufficient collateral to cover potential losses. When a position reaches its liquidation threshold, the following process is initiated:
Identify Positions for Liquidation: The clearing house detects long positions where the mark price has dropped below their liquidation price, and short positions where it has risen above theirs.
Execute Market Liquidation: For each flagged position, a market order is placed (sell for longs or buy for shorts) to fully close the position.
Calculate Realized Loss vs. Margin: Once the liquidation order is executed, the final fill price is compared with your margin to determine the realized loss.
Apply Liquidation Clearance:
If the realized loss exceeds your margin, the insurance fund covers the shortfall to prevent your balance from going negative.
If the realized loss is smaller than your margin, the excess margin is transferred to the insurance fund.
This entire process—recorded as a liquidation clearance—ensures that no trader ends up owing more than their margin, while the insurance fund helps safeguard the broader market from cascading defaults.
Unrealized P&L
Unrealized (Floating) P&L: Reflects changes in your open position’s value based on the mark price (or index price).
Realized P&L: Becomes final once you close some or all of your position. Realized gains or losses affect your wallet balance.
Conclusion
BTC futures provide a dynamic tool for hedging and speculating in our markets. Understanding key elements like leverage, funding rates, and liquidation processes is essential for managing risk effectively. Use these insights to navigate the futures market with confidence!
Stay informed and trade responsibly ⚠️