Overview

A BitMEX DOWN (Downside Profit) Contract allows buyers of the contract to participate in potential downside of the underlying instrument. The buyer pays a premium on trade date for which he is entitled to receive the difference between the strike and the underlying instrument settlement price on maturity date if positive, else no payment occurs. However, if the underlying touches or falls below the KO barrier price during the life of the contract it expires and settles early using the KO barrier price. All transactions are Bitcoin settled.

Investors can only be net long DOWNs, they cannot short sell. Only the BitMEX anchor market maker can be net short.

Why buy a BitMEX Downside Profit Contract?

Participate in a market decline

• This contract provides an efficient way to participate in market declines. The possible loss is limited to initial investment, which is usually a fraction of the coin price.

• Unlike a perpetual swap or future there is no liquidation price or margin call. This means buyers maintain a short market position during market rallies but still participate in declines that occur before expiry date.

Protection

• Overlay on top of a long Bitcoin portfolio to limit losses in a crash.

How is the settlement price at maturity calculated?

Assume the following:

Strike = USD 9,000

KO Barrier Price = USD 4,500

Regular expiry

.BXBT never touches or falls below KO Barrier Price during the life of the trade and .BXBT30M at maturity = USD 6,000

From the contract specifications:

Settlement price = Contract Size * (Strike - .BXBT30M) / .BXBT30M

Therefore, in this case we have:

Settlement price = 0.1 * (9,000 - 6,000) / 6,000 = 0.05 XBT

Early expiry

If .BXBT touches or falls below KO Barrier Price during the life of the trade then early expiry and settlement occurs using the KO Barrier Price:

From the contract specifications:

Settlement price = 0.1 * (Strike - KO Barrier) / KO Barrier

Therefore, in this case we have:

Settlement Price = 0.1 * (9,000 - 4,500) / 4,500 = 0.1 XBT

How does the settlement price of a BitMEX Bitcoin DOWN contract vary with .BXBT30M on expiry date?

Assuming a strike price of USD 9,000, the graphs below show how the settlement price of one Bitcoin DOWN contract varies with .BXBT30M on the expiry date.

If .BXBT touches or falls below the KO barrier price of USD 4,500, then early expiry and settlement occurs using the KO barrier price.

¹ The USD equivalent settlement price is only for illustrative purposes. The Bitcoin DOWN contract always settles in XBT.

What is the breakeven price and how is it calculated?

The breakeven price represents the .BXBT30M price (USD) required on maturity date for the settlement price of the BitMEX Bitcoin DOWN contract (XBT) to equal the average entry price (XBT).

Breakeven Price = Strike / (1 + (Average Entry Price / Contract Size) )

For example, if an investor buys BitMEX Bitcoin DOWN contracts with a strike of USD 9,000 at average entry price of 0.01 XBT then

Breakeven Price = 9,000 / (1 + (0.01 / 0.1) ) = USD 8,181.82

Can you provide an example of the hypothetical price of a BitMEX Bitcoin DOWN contract through the life of the trade?

In the examples above we have concentrated on the settlement at maturity, however investors can buy and subsequently sell the DOWN contract before expiry. See example of how the hypothetical price of a BitMEX Bitcoin DOWN may behave with varying .BXBT30M levels through the life of a contract. We also provide the hypothetical P&L under different trading scenarios.

Can you provide an example of how a BitMEX Bitcoin DOWN contract can be used to protect a long Bitcoin position?

We consider overlaying a long Bitcoin position with BitMEX Bitcoin DOWN contracts held until expiry³. This provides protection from the strike price to the KO barrier price for only a fraction of the coin price (on listing date).

³ The contract expires and settles early if .BXBT touches or falls below the KO barrier price. At that stage the long Bitcoin position is no longer protected from any further market declines.

See an example of the hypothetical P&L of this portfolio.

What are the minimum and maximum values of a BitMEX Bitcoin DOWN contract?

Minimum value is 0 XBT. Maximum value is 0.1 XBT.

How does the BitMEX Bitcoin DOWN contract compare to the perpetual swap?

A long Bitcoin DOWN contract has no liquidation price, whereas a leveraged perpetual swap does.

A long Bitcoin DOWN position only benefits from a decline below strike if it occurs before the fixed maturity date. The perpetual swap has no maturity date.

Can I buy and sell a BitMEX Bitcoin DOWN contract like a perpetual swap or future?

Investors can only be net long for a DOWN contract. They cannot short-sell as they can for a perpetual swap or future. Only the anchor market maker can short-sell.

Who is the net seller of a BitMEX Bitcoin DOWN contract?

A BitMEX-designated anchor market maker.

What are the fees for trading a BitMEX Bitcoin DOWN contract?

There are zero fees.

Mechanics of BitMEX DOWNs Markets

When trading DOWN contracts, a trader needs to be aware of several mechanics of the DOWNs market. The key components a trader needs to be aware of are:

1. Contract Size: This is the notional of each contract. You can see this information under the Contract Specifications of each instrument.
2. Position Marking: DOWN contracts are marked according to the Last Price.
3. Margin: DOWN contracts are fully margined products.
4. Settlement: BitMEX employs an averaging over a period of time prior to settlement in the calculation. This time frame may vary from instrument to instrument and traders should read the individual contract specifications to see when is expiry and the individual settlement calculation. However, if .BXBT touches or falls below the KO barrier price during the life of the contract it expires and settles early using the KO barrier price.

DOWN Contract Example

XBT7D_D95 is the 7-day DOWN contract for Bitcoin. The strike is the nearest USD250 increment to 95% of .BXBT30M on listing day. Traders can speculate on the price of Bitcoin at the Settlement Date, which occurs every Friday at 12:00:00 PM UTC. The margin required is the entry price, making it a fully margined product. The Settlement Procedure uses a 30-minute Time Weighted Average Price (TWAP) prior to expiry. However, if .BXBT touches or falls below the KO barrier price during the life of the contract it expires and settles early using the KO barrier price.

The specific Contract Calculations are as follows:

	Contract Calculations
XBT Contract Value	0.1 XBT
USD Contract Value	0.1 XBT * .BXBT
PNL Calculation	# Contracts * (Exit Price - Entry Price)
Early KO Settlement Price	If .BXBT <= KO Barrier Price during the life of the contract then early expiry at: 0.1 * Max(0, (Strike - KO Barrier)/KO Barrier)
Regular Settlement Price	Else, settlement price at regular expiry: 0.1 * Max(0, (Strike - .BXBT30M)/.BXBT30M)