Huobi derivatives markets (DM), a trading platform that supports cryptocurrency futures and perpetual contracts, has introduced perpetual swaps, which are a new type of derivative product that allows users to better hedge risk and access leveraged arbitrage opportunities during volatile or unstable market conditions.
As explained in a press release shared with Crowdfund Insider:
“Similar to traditional futures contracts, perpetual swaps allow users to buy or sell assets at a specific price to hedge against market fluctuations. But compared to the feature that traditional futures contracts have predetermined expiry dates, perpetual contracts let users hold positions as long as they’d like—as long as they maintain their required margins.”
Ciara Sun, VP of global business operations at Huobi Group, pointed out that crypto markets (along with the traditional financial markets) recently experienced extreme price swings. She explained that rapid price fluctuations can potentially have a significant but temporary impact on the global financial ecosystem. However, she noted that “volatility itself is a very normal part of market cycle.”
Sun explained that perpetual swaps offer traders yet another useful tool to help them take advantage of market movements in order to create arbitrage opportunities.
As noted in a company press release:
“At launch, Huobi DM supports inverse perpetual swaps, also known as coin-margined perpetual swaps, which are quoted in USD but margined and settled in a contract’s underlying digital asset.”
At present, the trading platform supports Bitcoin (BTC) swaps and will be adding other major digital assets such as Ether (ETH), EOS, and Litecoin (LTC).
As mentioned in the announcement:
“To provide users with flexibility in trading strategy, perpetual swaps trading is supported with up to 125X leverage. As with any derivative products, risks are directly correlated to leverage.”
Huobi DM has reportedly put in place several risk control measures to help traders reduce exposure and also bring down the possibilities of liquidation and clawbacks, which are quite common during extremely volatile market conditions where profited users have to pay a percentage of assets beyond their committed capital.
As explained in the release:
“All perpetual swaps require users to commit an initial margin as a guarantee when opening a position. To ensure positions are always properly funded and maintained, a funding mechanism anchors each position to the spot price of the corresponding asset and settles the contract every eight hours.”
Realized gains may be withdrawn following settlement, however, realized losses might bring about a significant decrease in margin ratio. In this case, Huobi might request that the trader commit additional assets in order to maintain the necessary margin balance. If this is not done, then there can be a diminishment in margin ratio to 0%, which will result in liquidation.
As noted in the release:
“In the event of huge decrease in margin ratio and frequent liquidation, Huobi DM’s new partial liquidation mechanism further protects users by gradually reducing a user’s position instead of liquidating it in full in a single event. The mechanism prevents the risk of sudden market swings that may otherwise trigger immediate liquidation of highly leveraged positions, causing extensive user losses.”
During irregular market conditions, a liquidation circuit breaker can stop liquidation when there are significant deviations between the liquidation and current market prices.
Huobi DM reportedly has a $500,000 insurance fund for each cryptocurrency token it lists, in order to prevent clawbacks resulting from negative balances and guarantee user profits, “assuming the corresponding insurance fund is carrying a positive balance at the time of incident.”
Sun confirmed that Huobi recently launched its partial liquidation mechanism and liquidation circuit breaker. The exchange can now offer retail and institutional traders a new way to take advantage of arbitrage opportunities while ensuring a secure trading environment.