Extreme Value Analysis of Bitcoin Futures Liquidation and Margin

Summary

The paper applies generalized extreme value theory to tail returns in bitcoin futures markets to examine forced liquidation risk, leverage, and margin levels for both long and short positions. Its empirical analysis uses BitMEX perpetual futures. It reports daily liquidation rates relative to outstanding futures of 3.51% for longs and 1.89% for shorts, and says forcibly liquidated traders used average leverage of 60 times. The authors argue that assuming normally distributed returns understates the margin needed to manage tail risk.

Based on the analysis, the paper recommends margins of 33% for long positions and 20% for short positions, corresponding to leverage limits of about three and five times, respectively, to bring the daily margin-call probability to 1%. These are model-based recommendations from a particular exchange and market period; the provided description does not give the sample dates or further robustness checks. The findings concern perpetual futures and liquidation risk, not general margin requirements across venues or products.

Key ideas

• Generalized extreme value theory is used to model the tails of bitcoin futures returns.
• The BitMEX analysis reports different daily liquidation rates for long and short positions.
• The paper reports high average leverage among traders whose positions were forcibly liquidated.
• It recommends higher margins to target a lower daily margin-call probability.
• Normal-return assumptions are reported to underestimate optimal margins.

Tags

# Liquidation, Leverage and Optimal Margin in Bitcoin Futures Markets


# Liquidation, Leverage and Optimal Margin in Bitcoin Futures Markets









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.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.