BITMEX INSURANCE FUND ‘LAST LINE OF DEFENCE’
In its official blog post, BitMEX explains that the stock exchange has received a lot of questions about its hedge fund activity on March 12 and 13. It also details what an insurance fund is and why it is needed. Contrary to popular belief, BitMEX claims:
It does not cover BitMEX running costs or contribute to BitMEX profits
It is not used to influence markets, intentionally or otherwise
Today we answer your questions on the Insurance Fund and how it performed on 12 and 13 March. Please refer to our blog: https://t.co/UbagNecszP pic.twitter.com/37PKWuhOFT
— BitMEX (@BitMEXdotcom) March 23, 2020
The insurance fund, the company says, is in place to attempt to prevent Auto Deleveraging (ADL). This is where the positions of profitable traders are deleveraged against liquidated positions to prevent bankruptcy. During the “unprecedented volatility” of March 12 and 13, the fund acted as “the last line of defence” by attempting to prevent ADL.
The Insurance Fund exists to act as a last line of defence to prevent ADL. On 12 and 13 March, despite the extreme market movement ADL was completely prevented.
BitMEX also notes that, unlike traditional exchanges, its traders never owe more than the margin posted thanks to the size and actions of its fund.
The post goes on to detail terms that traders must keep in mind when using the exchange, such as bankruptcy price and liquidation price and when the liquidation engine will take over the position. Actually, 80% of the post deals with the liquidation process
HOW DID THE LIQUIDATION ENGINE AND INSURANCE FUND PERFORM ON 12 AND 13 MARCH?
On the street, they say that BitMEX experienced a cascading margin call, forcing traders to send and send BTC to the process. Then BitMEX shut down due to hardware problems and recovered after 30 minutes.
This was pretty well admitted by the exchange saying that during this time:
The trading algorithm unwound this position into the market at prices that became gradually more aggressive (lower) as the long position grew and its time holding the position progressed.
During this time, the Liquidation Engine’s trading activity realised significant losses, crystallised as drawdowns from the Insurance Fund.
However, the exchange does not explain how this contributed to its hardware problems. Another fact that BitMEX does not seem to have responded to is why the insurance fund suffered such a small loss. In fact, it actually made a profit.
We have identified the root cause of two DDoS attacks at 02:16 UTC and 12:56 UTC, 13 March 2020. For a full account of what happened and how we are responding, please refer to our blog: https://t.co/RS7YtX1xOD
— BitMEX (@BitMEXdotcom) March 17, 2020
According to the latest post:
The largest drawdown on 13 March was 2,606 XBT
BitMEX Insurance Fund today is 35,028,299 XBT. If the fund is not used by the fund as a source of profit for the company or does not have market power, why did hedge funds such as Deribit go so far as to hardly affect BitMEX?