Derivatives, margins, leverage, hedging. These are terms that if you are not familiar with trading and associated markets, you may have heard but likely don’t understand. That’s ok. In this brief explanation, we will examine these different terms, what they mean, and how they relate to KuMEX, a cryptocurrency contracts trading platform. This is the latest development from the KuCoin team and a new and exciting addition to the KuCoin ecosystem.
You can trade on KuCoin and KuMEX from the same account
The addition of these trading tools to the cryptosphere is an interesting development and will have far-reaching impacts on the way users interact with cryptocurrencies and the marketplace. First, let’s take a look at what they mean and how they function.
What Are Derivatives In Crypto?
In its most straight forward, textbook definition a derivative is a financial security—an instrument that holds some type of value, i.e. stocks or bonds—that derives its value from an underlying asset or group of assets. What makes derivatives interesting is that it is not these assets themselves that are being traded. Instead, derivatives are contracts between two or more parties. These contracts gain or lose value based on the price fluctuations of the underlying asset and can allow traders to profit on these price movements without investing in the asset itself.
These derivatives can be used in a number of different fashions to accrue profits in the market. Originally developed to ensure balanced exchange rates on goods traded internationally, derivatives are most frequently used to hedge—or mitigate—risks against a certain market investment. Here’s an example:
Imagine an investor in the United Kingdom with investment accounts in British Pounds. This investor then purchases shares in an American company on a US exchange with the transaction carried out in US dollars. Because of the difference in currency value, and the fact that the investor’s holdings are primarily in GBP, they are now exposed to exchange risk. This means that if the value of the British Pound goes up in relation to the US dollar the profits they could realize are minimized when stocks are sold for USD and then converted back to GBP.
If the investor expects the value of GBP to go up they can invest in a derivative tied to the British Pound in order to hedge against this risk and minimize lost profits.
Trading With Leverage & Margins
The next financial tools that are worth understanding are the concepts of leverage and margins. Simply put, leverage allows you to trade more than the amount of money in your trading account. This increased trading power is made available by utilizing a margin account and is expressed as a ratio between the amount of money you have and the amount of money you can trade.
An example: If you wanted to trade an asset that was worth $100 USD with no margin you would need to put up the entire amount: $100. However, if you had a margin requirement of 1% you would only need $1 USD in your account to trade $100, and the leverage for the trade would be represented as the ratio 100:1. Leverage and margins provide traders with a possibility to profit far beyond the funds they actually hold. It should be noted, however, that traders utilizing these tools are also at risk of greater losses than would otherwise be possible.
Now that we have a better understanding of these concepts and how they relate to markets, let’s take a look at KuMEX.
KuMEX: KuCoin’s Derivatives Trading Platform
KuMEX is the new platform from KuCoin, with its public beta version released on July 8, 2019. KuMEX, now open for live trading, allows users to utilize margins to trade Bitcoin through contracts between BTC and USD. These contracts are called Bitcoin Mini Perpetual Contracts (XBT), and are used to replicate Bitcoin’s spot price while providing flexible leverage to traders. Each contract (XBT) represents $1 of Bitcoin’s price based on the average spot price of BTC across six different exchanges: Coinbase Pro, Bitstamp, Kraken, Gemini, Liquid and Bittrex.
For example, if a trader held 5 XBT at a price of $5000 they, thanks to leverage, would have trading power equivalent to 25,000. (5*5000 = 25,000). These XBT contracts do not expire and are designed to closely track the value reference Price Index via a Funding Rate mechanism. The different spot prices for BTC across the six exchanges are consolidated and represented on the Bitcoin Spot Index (BXBT), a volume-weighted index that is rebalanced every quarter.
Advantages for KuCoin Holders
KuMEX has many advantages for KuCoin users specifically. Anyone with an existing KuCoin account does not need to re-register with KuMEX; simply click on “Contracts” from the KuCoin website to access KuMex directly. KuMEX also plays a supportive role in the KuCoin ecosystem and further benefits KuCoin users. Since the official release of KuMEX, the platform uses 50% of all net revenues on the KuMEX platform for KCS Bonus distribution for KCS holders. Along with these features, KuCoin deposits to KuMEX are instantaneous, making KuCoin an easy, convenient starting point when exploring the KuMEX platform.
Another advantage of KuMEX is its attractive fee structure. KuMEX offer a negative fee (-0.025%) for Maker while a quite low fee for Taker (0.060%), which means you will be able to earn some trading fee by providing liquidity for the platform. There is also no minimum amount required to begin trading. Currently, only Bitcoin is traded on KuMEX, although there are plans to expand to different cryptos in the future.
How the daily interest rates are determined is also worth noting. Within each contract, there are two instruments: the Base Currency and the Quote Currency. The Interest Rate is a function of the difference between the two currencies. This function indicates the differences between the Base Currency and the Quote Currency at standard time intervals to determine interest rates.
KuMEX On The KuCoin App
Just recently, KuCoin has released a major update to the KuCoin mobile app. Amongst other upgrades and optimizations, the app now allows users to trade derivatives on KuMEX on the go.
This means that users can stay up to date and access the platform wherever they are so they never miss a chance to trade. To access KuMEX Bitcoin Perpetual Trading, users should go to the ‘Contracts’ tab. The “Assets” layout has also been adjusted in the app, and the fund deposit, withdrawal and transfer services have been opened for the contract account.
Trading On KuMEX
The cryptosphere is still behind traditional markets in many ways regarding functionality and the variety of features and tools available to traders. The development of these more advanced trading platforms, like KuMEX, that provide useful and different trading instruments is an important step in the further development of crypto markets. These tools can increase a trader’s potential to profit off these markets and in doing so can help attract more interested parties and strengthen the ecosystem as a whole. KuMEX is an exciting project and worth further investigation for anyone interested in the potential provided by derivatives, leverage and margin trading.
You can trade on KuCoin and KuMEX from the same account