Liquidation, Leverage and Optimal Margin in Bitcoin Futures Markets

Zhiyong Cheng, Jun Deng, Tianyi Wang () and Mei Yu

Papers from arXiv.org

Abstract: Using the generalized extreme value theory to characterize tail distributions, we address liquidation, 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.

Date: 2021-02
New Economics Papers: this item is included in nep-ban and nep-pay
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Journal Article: Liquidation, leverage and optimal margin in bitcoin futures markets (2021)
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