Marking a massive increase in holdings since the beginning of 2019, BitMEX’s insurance fund now reportedly holds more than $312 million worth of bitcoin, holding 0.15 percent of all BTC currently in existence.
The Need for Bitcoin Insurance
The massive cryptocurrency leverage trading platform serves as a facilitator for derivatives contracts between multiple parties. Using BitMEX, users are able to make leverage trades with a far higher amount of bitcoin than the amount they initially deposited. But this practice carries risk. For example, in the event that two traders are directly betting against each other, it’s possible that the winner will earn a greater profit than what the loser initially put up as collateral.
Traditional asset leverage platforms like the Chicago Mercantile Exchange (CME) have several levels of protection for such eventualities, starting with the ability to force “losers” to pay under threat of civil lawsuit, leading up to the possibility that major governments will bail out these trading houses if they are on the verge of wholesale collapse. Naturally, a smaller market like cryptocurrency, where all users expect to have direct access to platforms, don’t provide this level of protection.
This is where BitMEX’s insurance fund comes in. With available data going back as far as early 2016, BitMEX claims that this fund “grows from liquidations that were able to be executed in the market at a price better than the bankruptcy price of that particular position,” and that it is withdrawn from whenever customers are unable to fully meet the demands of their transactions. Of particular interest, however, is the rate at which this fund is growing.
BitMEX’s 31,300 BTC Fund
Since the beginning of 2019, BitMEX’s insurance fund has grown from 20,776 BTC in reserve to 31,295 BTC as of August 26, 2019, a more than 50 percent increase. In addition to its rapid rise, the fund is turning heads in the cryptocurrency community because its holdings represents a significant slice of all bitcoin in the world.
BitMEX claims that its notional annual trading volume is around $1 trillion, making the bitcoin hold in this insurance fund a relative drop in the bucket. Still, the inherent volatility of the cryptocurrency space can change things quickly.
Just last year, for example, OKEx found itself in the hole for $420 million as a direct result in the price fluctuation of crypto assets across the board. Even winning traders found themselves taking a loss, and the aggregate impacted both the futures trading community and OKEx itself.