Posted 9 months ago | by Ben Armstrong
Bybit Introduces its Mutual Insurance Fund
The Singapore-based cryptocurrency derivative exchange Bybit launched its service back in 2017 and has been increasing its features ever since. Now, with its recently launched Mutual Insurance fund, it is looking to hedge losses for its users.
Why are Hedging Instruments Important?
Futures trading is a high-stakes game as most future platforms are offering trading at high leverage magnifying the potential both for gains and losses.
This risk of loss has resulted in an increasing demand for hedging instruments, especially crypto-backed options.
Using options as hedging instruments requires a relatively advanced understanding of the workings of financial markets work and brings additional complexity for traders.
Users need to understand how various products play together and keep track of multiple open positions of different types.
Mutual Insurance is a Simpler Hedging Method
The mutual Insurance fund was launched by Bybit early this month and will provide traders an easier and more streamlined way to hedge their losses.
A trader can open a long or short position opened and sill be covered by the fund for up to 48 hours at a time.
A Black-Scholes model to is used to calculate the value of the premium by taking into consideration the price at the moment the cover is taken out and the level of leverage applied to the trade, which indicates liquidation risk.
When entering liquidation, partially or fully, the insurance fund is activated and a payout is applied to cover the losses.
A trader also has the choice to settle their insurance manually triggering the payout or let the payout be calculated at the expiration of the cover period.
The mutual Insurance fund is designed to self-fund with premium inflow balancing what’s paid out. Users only have to pay Bybit a nominal fee of 0.05% per premium while the company provided an initial injection to the fund of 200 BTC.
Mutual Insurance vs. Hedging Options
The big difference between Bybit’s Mutual Insurance and the use of options as hedging instruments is on the potential upside.
Mutual Insurance payout is limited to a settlement price equal to the estimated liquidation price of the insured position and has a fixed maximum payout per order of $200,000 while options contracts have unlimited upside potential.
It also allows traders to easily take out an insurance cover with a few extra mouse clicks as they open their position instead of having to open an entirely separate position, this makes the feature simple and easy to understand.
Moreover, Bybit’s Mutual Insurance is transparent and doesn’t have any mechanical edge working against the trader, It limits itself to offer protection against losses to its users.
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