Liquidation, leverage and optimal margin in bitcoin futures markets. Issue 47 (8th October 2021)

• Record Type: Journal Article
• Authors: Cheng, Zhiyong; Deng, Jun; Wang, Tianyi; Yu, Mei
• Is Part Of: Applied economics. Volume 53:Issue 47(2021)
• Page Start: 5415
• Page End: 5428
• Publication Date: 2021-10-08
• Subjects: Bitcoin futures -- liquidation -- margin -- leverage -- generalized extreme value theory; G11 -- G13 -- G32; Economics -- Periodicals; 330
• DOI: 10.1080/00036846.2021.1922597
• Languages: English
• ISSNs: 0003-6846

Abstract

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 outstanding 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 that normality assumption on return significantly underestimates optimal margins. Policy implications are also discussed.