How Does Leverage Trading Work on Bitmex?

Buy low, sell high. This is the basic understanding of the word “trading”. Be it stocks or socks, crypto or lambo; what’s important is making profit by selling higher than it was bought. But of course, life is always complicated. Volatility of the crypto market, with doomsday prophecies issued from well respected figures, are few of the reasons why venturing into crypto trading requires being sufficiently armed with adequate knowledge.

Different styles of crypto trading include day trading, swing trading, scalping, HODLing, but our focus in this article will be leverage trading and how it is done on Bitmex. Leverage trading is when a trader borrows extra funds in order to increase possible profits. Existing funds serve as collateral for the loaned funds. Leverage trading is very risky in the sense that chance of profit or loss is 50/50. However, it is popular with pro traders because one is always possible to make a profit even when markets slump.

How it Works

Bitmex is an A-list crypto exchange, one of whose service includes offering users up to 100x leverage. Of course, to get started, one needs to first set up an account with Bitmex. You’re not required to give your real names as creation of anonymous accounts is permitted on the platform. First action after account creation is funding your new account. Primary crypto allowed on Bitmex is BTC. It is however designated as XBT and given the value of 1 USD per XBT. As earlier mentioned, up to 100x leverage is allowed on Bitmex. What this means is that, if you have say 0.01 BTC, a 100x leverage will allow you trade 1 BTC in a single trade.

Regardless of which exchange is being utilized, there are two options when leverage trading. Either you go long or you go short. Going long means buying a contract when its value is low because you foresee its value increasing. Trader profits when contract gets sold at the increased value. While going short is selling a contract when its value is high, because you foresee it decreasing, so that you can buy it back at its low value, thereby making profit.

Bitmex Leverage Trading Contracts

Two types of leverage trading contracts are offered on the Bitmex trading platform:

  1. Futures Contract and
  2. Perpetual Contract

Futures Contract
As the name implies, a futures contract is fixing the price for a commodity (in this case digital assets) which is to be sold in future at that fixed price regardless of changes. For instance, a rice supplier and a rice farmer draw up a futures contract to sell 10 bags of rice at $10 each in 6 months time. At the stipulated time, the 10 bags of rice is delivered and buyer pays $100 for them. It is immaterial if price for a bag of rice has increased to $18 per bag or reduced to $7 per bag.

Now, switch rice for BTC (XBT), rice supplier for trader and rice farmer for Bitmex. The good thing about leveraging with a futures contract on Bitmex is that profit is made even when price plummets. Futures contracts are usually utilized as hedges for mitigating risks.

Perpetual Contract
It is similar to Futures Contract, but as the names implies, this is a contract with no expiry date. It is perpetually being renewed, making it suitable for long term investors.

Calculating Profit (and Loss)
Yes, probably the subtitle you first searched for when reading this article. It’s all about what one gains. Here is the slightly complicated formula:

Number of Contracts x Contract Value x (1/Entry Price – 1/Exit Price)

Application of Formula:
Remember, one contract equals 1 XBT which equals $1.
At 500 contracts worth $500 whose price increases by $50, profit will be calculated thus:
500 x 500 (1/500 – 1/550) = $45.45

Safe Guides and Mistakes to Avoid

Never open a position using 100% of available balance. Leave 50% for setting stop limit.
Bearing in mind the high risk and volatility involved, it is very possible to get rekt. So, start small as you train your trading muscles.
Just because you have been offered 100x leverage does not mean you should actually take it up. Limit your leverage so as to limit possible loss.

Trading, both traditionally and cryptowise is a risky venture. That of crypto markets is intensified, thanks to volatile markets and uncertain regulatory frameworks. Nevertheless, being sufficiently armed with requisite information would go a long way.

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