Diving into Derivative Exchanges, and the Fees Everyone Forgets About..

Lets start from the beginning..

BitMEX and ByBit are derivative exchanges offering short/long contracts valued in USD, but purchased in Bitcoin. Your account capital is held in BTC, but allow you to enter the market on different pairs including ETH, XRP, LTC, and many others. This is where many people get confused because you aren't actually trading the asset in question, rather $1 contracts for the asset. Since you aren't trading actual Bitcoin, rather contracts for Bitcoin, this is why these exchanges are called Derivative markets. 

This matters because it allows the user to amplify their buying power using leverage. These two sites offer up to 100x leverage. Many traders are initially attracted to these platforms because of the lucrative opportunity which presents itself during Cryptocurrency bull markets. However, the greater the potential for profit, the greater the potential for loss.

Want to get cheaper fees while trading? Use our affiliate links posted in our last blog post on 02/11/2020!

Before diving in, lets do an example:

You are trading $500 USD value held as BTC. You seen an opportunity go long, but you purchase $2500 in contracts. This is 5x more than your original capital, so it means you are on 5x leverage. You've amplified your buying power by borrowing from the exchange. Lets go over two scenarios:

1. BTC goes up 5% and you close position. The profit in this case would be 5% gain, amplified 5x, for a total of 25% of your original capital. This would mean you make $125 in BTC from your original $500 of BTC. Remember, these exchanges cost dollars, but your wallet/capital is held and settled in Bitcoin.

2. BTC goes down 3% and you close position. The loss in this case would be 15% of your initial capital. This would result in $75 dollars of BTC lost to this trade.

Leverage makes managing risk very hard. Novice traders should avoid high leverage like the plague. Remember, the number one goal of all traders is to not loose their entire account. Consider a trader on 100x leverage and the price drops 1%..

Getting an understanding..

The greatest way to understand how these platforms work is to use them! To be clear, this does not mean upload thousands to be leveraged hundreds of times. This is irresponsible: do not do it. Instead, accessing their testnet platforms allow you to gain risk free exposure:

https://testnet.bitmex.com/
https://testnet.bybit.com/app/exchange/BTCUSD

Either of these exchanges are more or less the same in principle. However, ByBit does have the better user interface, less prone to errors, and overall provides the better service. The TestNet will provide .02 BTC within a fake market, and it is wise to learn how to enter/exit positions correctly.

Here is a snippet from our Performante Premium learning model. You can find that we suggest jumping into TestNets in the second phase of learning. Every human must walk before they can run, and every trader must learn before they earn.. Or do they? 

Performante Premium is an education platform that allows you to earn while you learn. The team provides their own trades, why we like them, and the plan moving forward. This allows our students to follow if the wish, in addition to plethora of structured learning materials we provide.

Simply put, its our goal to put the funds back in your pocket as soon as possible. You can get 50% off your first month with the discount code: FinancialFreedom. Use the menu above to navigate to registration!

The fee everyone forgets about..

Every eight hours the platform will charge you, or rebate you a certain percentage of your position which is currently open. This number is dynamic, but you can access it any given time. This is what you're looking for: 

In this case, it is + 0.0100% of contracts open, to be charged/rebated in three hours time. Pretty simple to understand, and its crucial you realize this fee when considering PnL, especially with long term leveraged trades. Since it is charged three times per day, and subject to the leverage increase, the fees can become high fast! 

Funding rates.. You paying, or getting paid?

This is the golden question.. and the answer depends on the current funding rate. Lets consider the two possible scenarios:

1. Funding rate positive (example: 0.01000%)

If the funding rate is positive, then longs must pay shorts. Anyone with long positions will pay .01% of their total position value, and anyone with shorts will be rebated for the same.

2. Funding rate negative (example: -0.075%)

Converse to what we just discussed, if the funding rate is negative, then the shorts must pay the fee, and all long positions receive the rebate.

Summed up: you will generally get rebated if you trade against the trend, and charged for trading with the trend. Since the exchange will have majority of its liquidity long during a bull market, it makes sense to charge those who are long. Now this poses an interesting question.. Can funding rates be used to analyze the market, and speculate on price action?

Maybe?

It is hard to say with certainty if you can correlate the funding rates to future market direction. If the market is bearish, it will be negative. If the market is bullish, it is positive. Its in the sideways consolidation where the rates can swap back and forth - which doesn't provide a very clear signal to market direction.

Funding rates seem like something which can be used to predict the market, but it is much easier said then done. Its not really a true measure of future market momentum, rather sentiment based upon the proportion of shorts to longs. Many traders believe that in order to be succesful in the market, you must outsmart the rest. If that is the case, do you think funding rates is a reliable tool? That being said, relative volatility can be tracked with Bitcoin because funding rates will increase substantially (~.5% with significant 5-10% market moves). 

Why though?

Good Question! These exchanges implement funding rates because it is in their best interest that traders..trade! If a trader opens leveraged positions, but never closes them, then the exchange won't necessarily be making any money on the lent liquidity. Since these platforms charge fees for entry and exit, they might as well monetize the holding aspect as well. 

These fees are also only charged with their Bitcoin and Ethereum pairs. The other assets available are not subject to funding rate fees.

Modern Problems Require Modern Solutions!

There are many individuals who access Cryptocurrency trading websites while underage. Since there are no KYC regulations with crypto derivative exchanges, it doesn't verify your age. Although, in order to register you must agree that you are over 18 - and by choosing to lie, you're committing a crime. Its for this reason that the USA is forbidden from connecting to Bitmex, ByBit, and the endless low liquidity/volume versions out there. Again, using a virtual private network is a way to spoof the system.. However: the choice you make is your own, because the consequences will be solely yours to bear. 

Enjoy the read? One of your friends may too!

If you made it this far.. chances are you likely enjoy what Performante has to offer. Endless content via social medias, reliable insight from our free Discord community, and day or night contact. We provide all of this value for free because we are truly dedicated to helping anyway we can.

It would mean the world to us if you could spread the word. Maybe drop a previous blog link.. Invite someone to the Discord.. Send the content via DM.. Whatever it may be, sharing our content helps immensely.

Until next time.. Cheers!


Leave a comment