In May, Bybit unveiled a mutual insurance fund for derivatives traders and funded the pool with 200 BTC of its own. The product has since proven to be popular with savvy traders who are seeking short-term protection in the event of the market moving against their position. As a result, traders of Bybit’s BTCUSD contract can benefit from unlimited upside while safeguarding themselves against the short-term fluctuations that can easily liquid a long or short. Here’s how mutual insurance works and why it’s a valuable tool in the arsenal of sophisticated traders.
Insurance Against Bitcoin Being Bitcoin
Futures trading is a risky game. Fakeouts, shakeouts, barts, and other violent market moves, which play out in recognizable but unavoidable charting patterns, are a constant hazard. Having your trade liquidated due to a sudden market spike or trough can be infuriating. It’s a constant threat that can kill a promising trading career before it’s even gotten started.
Taking out insurance is a means of minimizing the downside risk without curtailing the upside payoff if things play out the way you expect them to. It’s a means of obtaining a two-way hedge, so that whatever happens you’re not left completely out of pocket. Mutual insurance doesn’t allow you to have your cake and eat it, but it can allow you to avoid liquidation, and for many traders, that’s a price worth paying.
How Bybit’s Mutual Insurance Fund Works
Bybit’s mutual insurance allows traders to hedge the potential loss in a perpetual contract they have open for BTCUSD. The premium they pay for this cover goes into the mutual insurance fund. If the contract they have insured incurs a loss, the trader will be compensated from the fund.
If you are long BTCUSD, you can purchase long protection against downside risk, and vice-versa: BTCUSD shorts can obtain short protection against upside risk. Mutual insurance is designed to operate as a short-term service that can protect traders during periods of uncertainty, when volatility is expected. Bybit allows traders to take out insurance lasting 2, 12, or 48 hours, with a minimum insurance amount of $500 to cover the corresponding amount of BTC contracts.
There’s no obligation to insure your entire position: in fact, with Bybit you can insure anything from 25% to 100% of it, up to a maximum amount of $200,000 per contract. For example, a trader holding a 20,000 BTCUSD short contract at $9,000 may decide to purchase 25% short protection. The corresponding insurance amount will be 5,000.
Let’s say a trader places an order for short protection, the index price is $9,000 and the expected liquidation price is $10,000. Should BTCUSD increase in price, the short protection will cover the price increase as far as $10,000. Should the contract settle above the insured price, the insurance protection will not be triggered, and the trader will not receive a payout. When the insured BTCUSD position is fully liquidated, the corresponding mutual insurance will be immediately settled.
Should You Take Out Mutual Insurance?
Mutual insurance, like the bitcoin positions it protects, is for experienced traders. You should have a good working knowledge of trading before you experiment with insurance, as this will add an additional layer of complexity. However, that doesn’t mean that mutual insurance is only for the pros: far from it. In fact, it’s an ideal risk management tool for traders who are trying to avoid blowing up their portfolio.
Bybit’s mutual insurance has been designed to be more user-friendly than the sort of two-way options spreads offered for hedging purposes on exchanges like Deribit, or Binance’s warrants. With Bybit charging just 0.05% of the premium by way of fees, the mutual insurance fund is fairly priced and ensures that the pool of funds goes to those it’s designed to help – traders. Mutual insurance provides price protection without dampening the upside from maintaining a BTCUSD contract. Used wisely, insurance is a smart choice for traders who want to ensure that they’ve covered all bases.