Bitcoin Exchange Deribit Looks to Become the New Playground for Margin Traders
Trading of cryptocurrency is slowly gaining traction as more people realize that these tokens and coins are here to stay and won’t fade away. Many are also interested in the token play for monetary benefits. Having heard stories of people making fortunes by investing in early tokens has still kept many people interested in the crypto verse.
As the crypto industry is evolving, a lot of products and services that were available before only for equities and other financial products are slowly making their way to crypto trading as well. One such prominent feature is margin or leverage trading, which is gaining momentum among crypto traders.
Overview of Margin Trading
Margin or leverage trading is a risky game that has been played in traditional financial markets by mature traders for quite some time now. It is a strategy where the trader uses borrowed funds from his broker and trade financial assets which eventually becomes the collateral for the borrowed fund.
As this trading strategy is highly risky, it is conducted only through a specialized account known as the margin trading which is different from the cash account used by all the investors. This separate account also allows investors to short sell the stocks, while buying can happen the same way either in cash or margin account.
Margin trading is only possible as there are lenders available who lend money in a bid to earn interest, provide leverage to traders so that they can invest or trade in larger amounts compared to what they have in hand.
As mentioned earlier, a lot of exchanges now allow margin trading for cryptocurrencies. But as the asset under consideration here is a little different, the rules of the margin trading also differ a bit when it comes to crypto.
In the equity markets, the lenders that provide leverage for margin are brokers. But in cryptocurrencies, this leverage is provided by the exchange and in some cases like Poloniex, it allows other users to provide loans to traders for margin trading.
Since crypto coins are fairly volatile, margin traders need to keep a close watch and have an effective risk management mechanism to avoid huge losses. As crypto markets turn their trend within minutes and have extreme fluctuations, a slight shift of focus could lead to huge losses for the trader. Since this losses are over borrowed money there are chances that the trader may lose his margin money as well and end up paying huge interest on borrowed money.
Deribit is one of the prominent Bitcoin’s derivate exchange which was founded by John Jansen who himself was an early cryptocurrency investor with an experience in options trading that he gained at the Amsterdam Options Exchange. In 2014, after trading cryptocurrency on a variety of exchanges around the globe, Jansen formed a vision to start a cryptocurrency exchange where he could integrate derivatives products for cryptos including futures and options.
John’s primary goal was that trade must function in a secure and high-performance environment. He slowly started building his team and it took him two years to get the exchange live which is called as Deribit.
Launched amidst growing interest for cryptocurrencies, Deribit gained traction mainly due to its added features such as derivative trading cryptocurrencies, that are only available in very few exchanges. It was the first and only platform in the world that offered plain “vanilla” European options as well as bitcoin futures with margin.
Till date, it remains the fastest and most technically advanced bitcoin exchange as its technology is in a position to handle a large number of requests with ultra-low latency.
Trade Cryptos With 100x Margin
Deribit, in mid-August, launched the beta version of its prominent virtual swap known as Deribit Perpetual. The Deribit Perpetual is an improved version and works on blazing fast speed against a traditional perpetual. A perpetual, as a product, is very complex to implement on an exchange and not many have been successful in doing it. Up until the Deribit launch, only Bitmex was offering it.
Even with only Bitmex offering, this product garnered between 40 percent to 50 percent of all the global trading in bitcoin. This product gained popularity because it allowed traders to open and built up positions without any actual transfer of bitcoin. Coupled with low fees and exponential leverage, the product became a trader’s darling.
Deribit Perpetual also stood out against the traditional perpetual because it came with improved features like blazing fast executions, almost 20x to 40x faster, low pricing and fair liquidations.
The offering became an instant success and raked up the volume of the exchange by over 50 percent within 2 weeks of the launch. Looking at its success and to provide competition to Bitmex, Deribit offered this product to traders with 100x leverage – which now allowed traders to take an exposure of $100 against every dollar they had in its account, after subtracting the trading fees.
Deribit vs. BitMex
While Deribit and Bitmex stand neck to neck while serving the derivative and margin trading segment of crypto traders, there are certain aspects where Deribit clearly stands out.
Differing Perpetual Swaps
While both exchanges provide the user with a perpetual swap product, BitMEX’s perpetual swaps work during an eight hour period. This means the exchange calculates the prices and carries out payouts, every 8 hours, according to the traders that holder long and short positions.
On the same product, Deribit makes the swap work differently. Instead of an 8-hour gap, Deribit pays out continuously to active positions depending on the discount or premium these positions have against the spot price. The way Deribit does it definitely better a beneficial than the 8- hour gap of Bitmex as this allows a smoother adjustment mechanism.
Deribit operates a fund with 25 bitcoins to provide protection against position bankruptcy. The is Deribit’s way of avoiding socialized losses. This is definitely a better way of handling position bankruptcies that Bitmex’s auto-deleveraging, a system adopted by Bitmex when a traders position is liquidated, the position is taken by BitMEX’s liquidity engine.
While both exchanges offer options trading, Deribit has and offers a wider range of option contracts to traders than BitMEX. The contracts that Deribit offers have strike(contact values)prices ranging from USD 2500 to USD 45000 with a longer expiration which goes as far as 29th March.
Order Execution and Transaction Speed
Deribit has one of the fastest technologies when it comes to order execution. Deribit processes orders within a few seconds, while Bitmex takes twice as longer. Although Deribit systems are much superior, one has to still consider Bitmex’s popularity and transaction load, which tends to make the latter a tab bit slower.
Still, Deribit’s system and speed stand out as its team has already tested 1,000 orders per trading block per second while their system capacity is capable to handle 5,000 orders per second. This is far superior to Bitmex which only had a capacity of 500 orders per second before it got overloaded.
What Traders Say of Deribit
Crypto Piglet (medium channel)- who calls himself a crypto enthusiast and a trader says Deribit is a lot more reliable platform from a user experience perspective. He also terms Deribit a “BitMex Killer.”
Another trader with Twitter handle “Thinking USD” also seems to be a big fan of Deribit:
With faster order processing, superior systems and a good variety of contracts, Deribit is definitely a more advantageous exchange which traders would love to transact on. The exchange needs to popularise itself and soon it will be able to compete against the Bitmex’s dominance in the crypto derivative sector.
Will Deribit reach to the heights of Bitmex in the crypto derivatives market? Let us know your views in the comments section.