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I heard something about the popularity of perpetual futures being owed to "insane leverage possible." Can anyone confirm/explain this?

wmf 3y ago
Yes, BitMEX blew up when they started offering 100x leverage so people could get rich or lose everything on small price movements.
acjohnson55 3y ago
The way a perpetual future works is that it's basically a bet between two parties on whether the price of Bitcoin will go up or down. Every day, the loser pays the winner by the amount of movement. But what if the loser doesn't want to pay? The winner is screwed. To prevent this scenario, but both sides are required to post collateral with the exchange, which gets used to settle the bets. The collateral is required to be a certain percentage of the size of price of Bitcoin. If, due to losing your bet, your collateral dips below the minimum amount required, it is repossessed by the exchange and your bets are terminated. This is considered leverage because it magnifies the risk of speculating on Bitcoin. One way to bet on Bitcoin is to simply buy it. If the price of Bitcoin goes from $10,000 to $11,000, that's a 10% reform return. But if there's an exchange that allows 100x leverage perpetual futures, what they're saying is that I can buy a perpetual future by only posting 1% of the price of the underlying as collateral. So if I buy a perpetual future on Bitcoin while the price is at $10,000 and it goes to $11,000, my return is way higher. I only need to put up $100 for collateral but I just made $1000. That's a 1000% return. The problem, as you might guess, is that if the price falls, the exchange takes my $100, whereas if I had bought Bitcoin, I'd still own the Bitcoin. There's also a problem that the exchange can easily blow up if the market moves too fast for them to liquidate the losers and make the winners whole. The greater the amount of leverage the exchange allows, the greater the chance of this happening.
FabHK 3y ago
Yes. However, that’s a feature of future generally, not only perpetuals. However, BitMEX really upped the ante with its 100x product.

wmf 3y ago

Yes, BitMEX blew up when they started offering 100x leverage so people could get rich or lose everything on small price movements.

acjohnson55 3y ago

The way a perpetual future works is that it's basically a bet between two parties on whether the price of Bitcoin will go up or down. Every day, the loser pays the winner by the amount of movement. But what if the loser doesn't want to pay? The winner is screwed. To prevent this scenario, but both sides are required to post collateral with the exchange, which gets used to settle the bets. The collateral is required to be a certain percentage of the size of price of Bitcoin. If, due to losing your bet, your collateral dips below the minimum amount required, it is repossessed by the exchange and your bets are terminated. This is considered leverage because it magnifies the risk of speculating on Bitcoin. One way to bet on Bitcoin is to simply buy it. If the price of Bitcoin goes from $10,000 to $11,000, that's a 10% reform return. But if there's an exchange that allows 100x leverage perpetual futures, what they're saying is that I can buy a perpetual future by only posting 1% of the price of the underlying as collateral. So if I buy a perpetual future on Bitcoin while the price is at $10,000 and it goes to $11,000, my return is way higher. I only need to put up $100 for collateral but I just made $1000. That's a 1000% return. The problem, as you might guess, is that if the price falls, the exchange takes my $100, whereas if I had bought Bitcoin, I'd still own the Bitcoin. There's also a problem that the exchange can easily blow up if the market moves too fast for them to liquidate the losers and make the winners whole. The greater the amount of leverage the exchange allows, the greater the chance of this happening.

FabHK 3y ago

Yes. However, that’s a feature of future generally, not only perpetuals. However, BitMEX really upped the ante with its 100x product.