What is Bybit's mutual insurance fund? How does it benefit investors? Table of Contents
- What is Bybit's mutual insurance fund?
- 1. Bybit Mutual Insurance Overview
- 2. Purchase mutual insurance
- 3. Mutual Insurance Account
- 4. Number of insurance contracts
- 5. Insured price/compensation price
- 6. Compensation calculation
- 7. Payout limit
- 8. Trigger conditions for payment
- 9. Mutual Insurance Fund
- 10. Mutual insurance costs
- 11. Automatic renewal
- 12. The impact of perpetual contract position changes on mutual existence
- 13. Compulsory early settlement of mutual guarantees
What is Bybit’s mutual insurance fund?
Mutual insurance is a risk management tool for perpetual contracts. It is a set of functions that Bybit provides traders to hedge against losses in perpetual contracts. When a trader holds a perpetual contract position in Bybit, he can purchase mutual insurance for this position. The premium enters the “mutual insurance fund”. During the insurance period, if the perpetual contract loses due to price fluctuations, the “mutual insurance fund” can compensate the insured positions.
Bybit mutual guarantee has corresponding guarantees for long and short two-way positions:
Long position insurance, that is, under the premise of holding a long position in a perpetual contract, mutual insurance is purchased to protect the long position when the price drops. The compensation price at the time of settlement is lower than the insured price, and the insurance is paid; the compensation price at the time of settlement is higher than the insured price, and the insurance is invalid and expired.
Short position insurance refers to buying mutual insurance under the premise of holding short positions in perpetual contracts, which protects short positions when prices rise. When the compensation price at the time of settlement is higher than the insured price, the insurance will be paid; when the compensation price at the time of settlement is lower than the insured price, the insurance will be invalid and expired.
At present, Bybit Mutual Insurance provides three insurance durations: 2 hours, 12 hours, and 48 hours.
What is Bybit’s insurance fund? How does it work?
1. Bybit Mutual Insurance Overview
| Underlying asset | BTCUSD |
|---|---|
| Types | Long position insurance (Long Protection corresponds to long position contracts) and Short position insurance (Short Protection corresponds to short position contracts) |
| Expire date | 2 hours, 12 hours, 48 hours |
| Minimum number of insurance contracts | 500 quantity |
| Number of insurance contracts | 25%/50%/75%/100% of the value of BTCUSD perpetual contract The maximum number of insurance contracts for each mutual insurance is USD 200,000 The maximum number of insurance contracts in the account is USD 1 million |
| Premium | Based on the Black-Scholes option model, the mutual insurance fund coefficient, maximum compensation coefficient and short-term insurance sentiment coefficient are used for adjustment |
| Mutual insurance fee | Number of insurance contracts *0.05% (The settlement unit is BTC) |
| Total cost of mutual insurance | Premium + Mutual Insurance Fee |
| Insured price | Index price of BTCUSD when buying mutual insurance |
| Claim price | BTCUSD index price at the time of mutual guarantee settlement |
| Trigger conditions for mutual insurance and indemnity payment | 1. Automatic settlement at maturity 2. The user takes the initiative to settle 3. The insured perpetual contract is fully liquidated, and mutual insurance is automatically settled 4. The insured perpetual contract is forced to close by steps, mutual insurance is automatically settled |
Currently, Mutual Insurance can only be placed and viewed through the PC web terminal, and only supports BTCUSD.
Go to Bybit’s Official Website
2. Purchase mutual insurance
After purchasing a perpetual contract, users can find a mutual guarantee buy entry in the contract holding area. The user can purchase one or more mutual insurance contracts for a position contract, and the sum of all mutual insurance contracts cannot be greater than the number of position contracts. When purchasing mutual insurance, you need to pay premiums and handling fees.
3. Mutual Insurance Account
To purchase mutual insurance, traders need to transfer BTC funds from the trading account to the mutual insurance account.
Traders need to pay attention to the slightly different operation of mutual insurance accounts when purchasing mutual insurance or automatic renewal in the case-by-sale mode and the full-scale mode:
- Margin by warehouse mode:
- If the balance in the insurance account is not enough to pay the premium, the system will automatically deduct it from the trading account. This is feasible because the free margin collected in the margin-by-margin mode will not affect the liquidation price of the position.
- Whole-storage margin mode:
- If the balance in the insurance account is not enough to pay the premium, the system will not deduct from the transaction account, but cancel the transaction. Because the margin collected under the full position margin mode will affect the liquidation price of the position.
Go to Bybit’s Official Website
4. Number of insurance contracts
The number of insurance contracts refers to the number of insured contracts selected by the trader when purchasing mutual insurance.
Traders can choose the amount of mutual insurance to purchase in proportion to the number of contracts currently uninsured (25%/50%/75%/100%)
Example: A – trader shorts 20,000 perpetual contracts at $8,000 and chooses 25% when purchasing short position insurance. The corresponding number of insurance contracts is 5,000.
After successfully purchasing the insurance, the number of insured contracts = 5,000, and the remaining number of insurable contracts is 15,000.
After that, the trader wants to purchase more short position insurance to hedge the risk. At this time, if he chooses 100% of the number of insurance contracts, an additional 15,000 short position insurance will be purchased to achieve full coverage of all 20,000 contracts.
5. Insured price/compensation price
The insured price refers to the index price of BTCUSD when the mutual insurance is purchased. Since the index price changes in real-time, the insured price may deviate from the latest market price seen by the trader when placing an order.
When the difference between the insured price displayed when the order is placed and the insured price actually received by the system exceeds 2%, a rejection notice will appear in the system.
This feature can prevent insurance from successfully selling when the insured price exceeds expectations, after all, the price has been fluctuating with the market. It can be used as a security mechanism to protect traders when the market is turbulent.
The compensation price refers to the index price at the time of mutual insurance settlement.
Go to Bybit’s Official Website
6. Compensation calculation
If the insurance payment price > insured price, long warehouse insurance is invalid and expired, no compensation will be made.
Short position insurance compensation = number of insurance contracts * (1/insured price-1/insurance compensation price)
If the insurance payments Price < insured price, short position insurance is invalid and expired, no compensation will be made. Long warehouse insurance payout = number of insurance contracts* (1/insurance payout price-1/insured price)
If the insurance payment price = insured price, long position insurance, and short position insurance are invalid and expired, and no compensation will be made.
Due payment, insurance payment price = expiration time insured sustainable price index contract user option billing, insurance claims settlement price = retention time is sustainable price index contract strong flat payment, insurance payment price = strong level contract time Insured sustainable price index
7. Payout limit
The maximum compensation limit of mutual insurance is determined by the liquidation price of the perpetual contract at the time of purchase.
During the holding period, the insured position may adjust the leverage, call margin, increase or decrease the position, etc., which may cause the liquidation price of the insured position to change, but the contract compensation limit remains at the liquidation price at the moment when the insurance takes effect constantly.
For long position insurance, the maximum amount of compensation = the number of insurance contracts * (1/the liquidation price of the insured position at the time of purchase of insurance-1 / the insured price)
Short position insurance, the maximum amount of compensation = the number of insurance contracts * (1/ the insured price- 1/Liquidation price of the insured position at the time of insurance purchase)
For example, if a trader buys a 10,000 BTCUSD long perpetual contract, the index price when the position is opened is $7,000, and the liquidation price is $6,000. If the position is insured, if the price of BTCUSD falls, the insurance can at most cover the loss of the perpetual contract that falls to $6,000.
Even if different users insure positions of the same value at the same time, because different users’ positions correspond to different liquidation prices, that is, different compensation caps, the premiums will be different.
Go to Bybit’s Official Website
8. Trigger conditions for payment
- A. Automatic settlement at expiration: the time limit selected by the user expires (2 hours, 12 hours, 48 hours), and insurance settlement is triggered immediately.
- B. User active settlement: As long as the insurance is still valid, the trader can choose to settle the insurance at any time.
- C. Complete liquidation of the insured perpetual contract: When the insured perpetual contract is completely liquidated, all corresponding insurances will be settled immediately.
- D. Step-by-step liquidation of the insured perpetual contract: The insurance of the corresponding amount of the perpetual contract that is liquidated by the step-by-step liquidation is settled instantly.
9. Mutual Insurance Fund
The “mutual insurance fund” is a compensation fund for the “mutual insurance” service. If the service takes effect within the validity period, the “mutual insurance fund” will compensate the insured positions that lose money. Bybit announces the balance of the “mutual insurance fund” at 0:00 UTC every day.
Mutual insurance fund balance = Mutual insurance fund activation amount + Mutual insurance premiums received-Mutual insurance settled claims-Mutual insurance outstanding claims
When Mutual Insurance went live, Bybit injected 200 BTC into the mutual insurance fund as the starting amount of the mutual insurance fund.
Go to Bybit’s Official Website
10. Mutual insurance costs
Insurance costs are based on the Black-Scholes option-pricing model.
Based on the Black-Scholes pricing model, premiums will be adjusted according to the following conditions:
- Mutual insurance fund coefficient
- Mutual insurance fund coefficient = reference value of mutual insurance fund balance / mutual insurance fund balance. The reference value of the mutual insurance fund balance is determined by the sum of the current insurance contracts.
- Maximum payout factor
- The maximum payout coefficient is determined by the sum of the maximum payouts of all current insurances in effect.
- Short-term insurance sentiment coefficient
- The short-term insurance sentiment coefficient is determined by the ratio of the number of unilateral insurance purchases and the moving average purchases within 1 minute and 15 minutes. In order to provide a fairer premium quotation, Bybit will further adjust different coefficients based on feedback from all parties.
Go to Bybit’s Official Website
11. Automatic renewal
Traders can turn on the automatic renewal function for mutual guarantees of the same duration, quantity, and direction. The automatic renewal function can be turned on or off at any time.
When the automatic renewal is executed, the following conditions must be met:
- The number of mutual insurance contracts to be renewed is not greater than the number of current positions.
- The direction of the mutual insurance contracts for renewal is the same.
- When automatic renewal is triggered, the mutual insurance account has sufficient balance to pay premiums.
- The number of mutual insurance contracts has not been triggered before this Stepped liquidation was lightened.
Special attention should be paid to the fact that the market price and risk level at the moment of the renewal operation are different from the initial purchase, so the renewal premium, insured price, and maximum compensation may be different from the initial purchase.
Go to Bybit’s Official Website
12. The impact of perpetual contract position changes on mutual existence
When the trader increases the position: the insurance that has been purchased will not be affected. Traders can add insurance for new positions.
When the trader reduces the position: the insurance has been purchased will not be affected, but the automatic renewal function may be affected
13. Compulsory early settlement of mutual guarantees
When the balance of the mutual insurance fund is insufficient, the unsettled mutual insurance may be forced to settle in advance.
All unsettled mutual guarantees will be calculated according to the following formula to calculate the “advance settlement order”. If a trader has multiple mutual insurances at the same time, each mutual insurance policy will be sorted separately.
Sorting coefficient = number of insurance contracts x mutual insurance expected compensation/premium
The estimated compensation for mutual insurance refers to the estimated amount of compensation that can be obtained assuming mutual insurance is settled at the current index price.
Total Compensation Ratio (TPS) = Estimated Total Compensation/(Mutual Insurance Fund Balance + Estimated Total Compensation)
- The total loss ratio (TPS) reaches 70%, and the system reminds everyone of each other’s risk.
- The total loss ratio (TPS) reaches 80%, and the top 50% of the insurance contracts on the entire platform will be settled immediately according to the rankings. The settlement price is the index price when the 80% ratio is triggered.
- The total loss ratio (TPS) reaches 90%, all insurance is settled immediately, and the settlement price is the index price when the 90% ratio is triggered. After all, insurance is compulsorily settled, Bybit mutual insurance service will be suspended for 24 hours
- Bybit provides restart funds to mutual insurance funds and restarts services.
Go to Bybit’s Official Website
Please check Bybit official website or contact the customer support with regard to the latest information and more accurate details.
Bybit official website is here.
Please click "Introduction of Bybit", if you want to know the details and the company information of Bybit.
Comment by Hans
April 24, 2024
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