Thanks to a recent article published on the official blog of Binance, we got to know the functioning and importance of the settlement and other mechanisms of protection of negative balances in the futures markets and other derivatives of cryptocurrencies; and in this publication we explain it to you. The futures market Bitcoin and major altcoins are living their heyday; the leverage may be the most attractive feature for this situation as well, thanks to the fact that the traders can benefit considerably from the movements of the market by very small. With leverage, an investor is able to open larger positions than would bear the initial capital. To explain in a simple way, if your service provider offers you leverage to 20x, you can operate as if you had a capital 20 times larger. Is tool allows you to generate larger profits, but in the same order of magnitude, can result in large losses. Not to be used with caution, it can generate the total loss of the capital in just a single entry to the market; and even leave a negative balance by the closures, inaccurate; for this latter reason they are of great importance to the insurance funds and the mechanisms of liquidation, to the proceeds of successful operations.
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How does the settlement?
The settlement is the primary mechanism of risk management that are imposed by the major exchanges and brokers, to protect customers from falling into a negative balance by using leverage. In a market as volatile as that of cryptocurrencies, this protocol plays a role of great importance, since the gaps in the market can bring capital quickly to zero, and, therefore, generate a lack of margin for the position to continue on course. To avoid this situation, there is the price of bankruptcy, where the capital is not enough anymore, and that in theory, you should close the position immediately; however, the volatility does not allow this to happen as expected, and for that reason is born another concept, known as the settlement price, located above or below the bankruptcy, to ensure the profits of the positions successful.
Other methods to ensure that the gains in derivatives markets cryptocurrencies
When the exchange is not able to close out a position before they result in a negative balance, you can use 3 different methods to cover this gap, and are detailed below: insurance Funds: it Is maintained by the one who offers the service, thanks to the difference that exists between the price of bankruptcy, and the settlement price. System of loss sharing: With this method, the negative balances are distributed between the profits of the operators rentablesLiquidaciones of deleveraging auto: For the application of this method, the exchange selects the operations in order of leverage, and profitability; by liquidating immediately to cover negative actions. This type of methods have significant pros and cons. The compensation, bankruptcy systems, with losses socialized, and liquidations of desapalacamiento auto-generate an environment clear; while against it can be harmful for traders that manage the risks with the utmost caution. To avoid this environment is negative for operators careful, the insurance funds to absorb immediately the excess of losses without disrupting the ecosystem; however, for against this mechanism, in some cases, tend to grow without control, and that have concluded in settlements aggressive. In the next few days we will be explaining in more detail each one of these alternative methods, which solve the problem of the gap that is generated in some cases. Stay abreast of our publications and continues to educate yourself with this type of information. The following two tabs change content below. Creative editor and trader of cryptocurrencies, currencies, fiat, and commodities.