In the wake of Black Thursday, Huobi Group’s derivatives platform launched a perpetual swaps product it says can help cryptocurrency traders profit from market volatility, and also hedge against it.
Huobi DM’s March 30 launch of the perpetual swaps allow users to “better hedge risk and create leveraged arbitrage opportunities in volatile market conditions,”—such as the Black Thursday crash—it said in a release.
Of course, the risk of making any bet at 125x the collateral you put up is substantial. And perpetual swaps don’t come with an end date.
“As we’ve recently experienced, sudden market swings can have a significant yet temporary impact on the broader financial ecosystem, but volatility itself is a very normal part of market cycle,” said Ciara Sun, VP of Global Business of Huobi Group. “Perpetual swaps provide traders another tool in their arsenal to capitalize on market movements to create arbitrage.”
Perpetual swaps ‘exploit market volatility’
A number of other exchanges including OKEx and BitMEX offer perpetual swaps, which were created in the cryptocurrency market. They are similar to normal swaps contracts, which allow holders to “buy” or “sell” an asset—bitcoin in this case—at a set price at a set time. In reality, neither party owns the asset—all they do is pay the difference in the agreed-upon price at expiration. Perpetual swaps simply allow traders to keep the contract open indefinitely, settling every eight hours.
Technically, Huobi DM’s product is an inverse perpetual swap, which means that the set price is in dollars, but the contract is settled in the underlying asset—bitcoins. The Huobi Group’s release said it will soon add perpetual swaps for ether (ETH), EOS, and Litecoin (LTC).
High leverage means high risk
Of course, perpetual swaps are only perpetual if the trader maintains the required margin of collateral in their accounts. Huobi DM’s perpetual swaps product allows 125x leverage which, needless to say, brings its own risks.
A loss can lead to dramatic decreases in margin, which can in turn lead to margin calls demanding more assets be put up as collateral to avoid liquidation of the perpetual swap.
To help prevent liquidation, the perpetual swaps can use the partial liquidation mechanism Huobi put in place for its futures contracts on March 18. This begins selling off a trader’s position in stages rather than an immediate liquidation. A circuit breaker halts liquidation in times of extreme price fluctuations.
“Perpetual swaps have been on our roadmap for quite some time, but we wanted to ensure we had the right risk controls in place before we made it available to users,” Sun added. “We’re now able to give both retail and institutional traders a new way to harness arbitrage opportunities.”
Huobi DM has established a $500,000 insurance fund for the bitcoin perpetual swaps, and will do the same for the other coins when they launch.