Liquidation, Leverage and Optimal Margin in Bitcoin Futures Markets

21 Pages Posted: 18 Feb 2021

See all articles by Zhiyong Cheng

Zhiyong Cheng

University of International Business and Economics (UIBE)

Jun Deng

University of International Business and Economics (UIBE) - School of Banking and Finance

Tianyi Wang

University of International Business and Economics (UIBE) - School of Banking and Finance

Mei Yu

University of International Business and Economics (UIBE)

Date Written: February 8, 2021

Abstract

Using the generalized extreme value theory to characterize tail distributions, we address liqui- dation, leverage, and optimal margins for bitcoin long and short futures positions. The empirical analysis of perpetual bitcoin futures on BitMEX shows that (1) daily forced liquidations to out- standing futures are substantial at 3.51%, and 1.89% for long and short; (2) investors got forced liquidation do trade aggressively with average leverage of 60X; and (3) exchanges should elevate current 1% margin requirement to 33% (3X leverage) for long and 20% (5X leverage) for short to reduce the daily margin call probability to 1%. Our results further suggest normality assumption on return significantly underestimates optimal margins. Policy implications are also discussed.

Keywords: Bitcoin futures; Liquidation; Margin; Leverage; Generalized extreme value theory

JEL Classification: G11, G13, G32

Suggested Citation

Cheng, Zhiyong and Deng, Jun and Wang, Tianyi and Yu, Mei, Liquidation, Leverage and Optimal Margin in Bitcoin Futures Markets (February 8, 2021). Available at SSRN: https://ssrn.com/abstract=3781646 or http://dx.doi.org/10.2139/ssrn.3781646

Zhiyong Cheng

University of International Business and Economics (UIBE) ( email )

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

Jun Deng (Contact Author)

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

Tianyi Wang

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

Mei Yu

University of International Business and Economics (UIBE) ( email )

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

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