Understanding of BW Contract Trading System

Content:

1. Understanding of "Contract Characteristics"
2. Understanding of the BW perpetual contract trading system

 Before trade contracts, we need to pay close attention to the fact that: the contract is a high-yield and high-risk trading. Earning and loss are of the same origin, so please pay attention to risk control, judge your investment ability rationally, and make investment decisions prudently.

1. First, let's get to know "Contract Characteristics"

(1)Standardised Contract: Exchange specifies and regulates the contents of a contract based on various considerations. Both parties only need to make a number of contracts according to their respective needs. 

Take BTC_USDT perpetual contract as an example:

Bitcoin value of a contract: 0.001 BTC

USDT value of a contract: 0.001 BTC * BTC_USDT price

Minimum contract amount: 1 contract

Due or not: This is perpetual contract with no expiration date. No settlement required.

Initial margin rate: 1%, that is: Max 100X leverage at opening position

Maintenance margin rate: 0.5%, that is: Max 200X leverage during holding the position

(2) Delivery at Maturity: If there is an expiration date on the contract then there will be future delivery; without an expiration date, the contract will last perpetually.

According to the expiration date of contract, the contract can be divided into "Delivery at Maturity Contract" and "Perpetual Contract". What are the characteristics of these two contracts?

 

For example: BW's BTC_USDT contract is perpetual contract.

3)Bilateral Transaction: Contract transaction provide “long” and “short” 2 directions.

For example:

 

(4) Margin System: 

Contract provides leverage function, so traders only need to pay a certain margin, then will get a contract with corresponding enlarged value by leverage multiples. 

The contract is a high-yield and high-risk business. Please pay attention to risk control, judge your investment ability rationally, and make investment decisions.

For example: If you pay 10￥ as margin with 20 X leverage, you can trade the contract of 10*20 = 200. Leverage enlarges profits as well as risks. Please use leverage carefully.

For example:

Examples of adding leverage without consideration of comission fees, etc.

Assuming that: currently, 1 BTC values 5000 USDT

Spot Goods

Initial Stage: 

Cost: 5000 USDT, Buy: 1 BTC

Earnings, Price rose by 10% (500 USDT), to 5500 USDT:

Earnings = + 500 USDT

Earning rate = 500/5000 = +10%

Losses, Price fell by 0.2% (10 USDT), to 4990 USDT

Earnings = - 10 USDT

Earning rate = -10/5000 = -0.02%

Rise 1$ , 1$ earning.

Fall 1$, 1$ loss.

100X Leverage 

Initial Stage: 

Cost: 5000 USDT Margin

1 BTC_USDT contract values 0.001 BTC,

100X leverage, can hold contract with value of 5000 * 100 USDT,

x contract(s) * 0.001 BTC * 5000 BTC_USDT = 5000 (Margin) * 100 (leverage multiple)

Can buy: 100000 BTC_USDT perpetual contracts

Earnings, Price rose by 10% (500 USDT), to 5500 USDT:

Earnings = 100000 contracts * 0.001 BTC * (5500-5000) = +50000 USDT

Earning rate = 50000/5000 = +1000%

Losses, Price fell by 0.2% (10 USDT), to 4990 USDT

Earnings = 100000 contracts * 0.001 BTC * (4990-5000) = -1000 USDT

Earning rate = -1000/5000 = -20%

Rise 1$ , 1 * 100$ earnings.

Fall 1$, 1 * 100$ losses.

(5) Maintenance Margin: Maintenance margin is the min deposit standard to maintain the current contract position. If the contract position deposit is lower than the maintenance margin, the current contract position will be forced to close, which is also one of the ways to control risk.

(6) Counterparty Breach Risk: In the digital currency market, the exchange is responsible for transaction confirmation, delivery, and settlement of contract transactions, and controls the counterparty breach risk of contract transaction through risk funds and automatic position reduction system.

1.  Understanding of BW Contract Transaction System

(1)In "Contract Transaction", you can hedge your position by operating in the opposite direction of "Opening Operation".

BW contracts are traded as "Unilateral Position". At any time, you can only hold one direction position, "Long" or "Short".

 (2)"Leverage" Characteristic of Contract Products

BW contract products provide up to 100 X opening leverage. It means that you can buy a contract with a value of up to 100 USDT and support it with only 1 USDT.

BW Contract Transaction "Unilateral Position" Mechanism

The max leverage available for a specific contract product is as follows:

BTC_USDT perpetual contract, current max opening leverage is: 100 X;

For other products, please find BW.io Web~

BW perpetual contract is a financial derivative suitable for virtual currencies.

Generally speaking, a perpetual contract is equivalent to a spot market where you can go short and long, with leverage and no expiration date.

(3). What is Perpetual Contract? 

BW perpetual contract is a financial derivative suitable for virtual currencies.

Generally speaking, a perpetual contract is equivalent to a spot market where you can go short and long, with leverage and no expiration date.

1. What is Marked Price?

In the contract transaction, we will come into contact with three kinds of prices.

They are: "Latest Transaction Price", "Index Price" and "Marked Price".

Take the "BTC_USDT Perpetual Contract" of BW Exchange as an example, which has been put online and operated steadily. The three kinds of prices are as follows:

The "9963.8" in the middle is the "Latest Transaction Price" of contract transaction, which is the transaction price after a transaction is matched by orders issued by the buyer and seller.

The price "9960.3" on the left below is "Index Price" and the price "9960.7" on the right below is "Marked Price".

1. Why use "Marked Price"?

BW uses "Marked Price" to calculate the unrealized earnings and losses of contract positions and to make the judgment of forced liquidation.

The use of "Marked Price" can avoid to the greatest extent that some people maliciously manipulate the real-time market of the contract for a short period of time, which leads to unnecessarily forced liquidation to users.

Use of "Marked Price"

BW uses "Marked Price" to calculate the unrealized earnings and losses of contract positions and to make the judgment of forced liquidation.

It means that after the execution of contract entrusted order, positive or negative unrealized earnings and losses may be immediately seen in "unrealized earnings and losses" of the position. The reason for this situation is that the current "Latest Contract Transaction Price" and "Marked Price" are different.

It should be noted that: the closing earnings and losses are determined by the closing transaction price. Therefore, there will be differences between the unrealized earnings and losses of the position and the real earnings and losses of the position after closing.

1. Capital Cost 

Capital cost is an important mechanism to fix spot prices in the perpetual contract.

Capital cost is generated every 8 hours at three-time points: 00:00 (UTC+8), 08:00 (UTC+8) and 16:00 (UTC+8). 

Only if you hold a position at these three points can you charge or pay capital cost? If you close your position before these three points, you do not need to charge or pay the capital costs.

Capital cost you charge or pay is calculated as follows: capital cost = nominal value of the position * capital cost rate.

The nominal value of your position has nothing to do with leverage. For example, if you hold 100 BTC_USDT contracts, you will be charged or paid the nominal value of these contracts, not based on how much margin you have allocated to the position.

When the capital rate is positive, long pays short. When the capital rate is negative, short pay long.

Calculation of capital cost rate

The capital cost rate consists of two parts: the interest rate and premium index.

This rate is designed to ensure that the transaction price of a perpetual contract keeps up with the spot price. In this way, a perpetual contract is equivalent to the spot market for margin trade, were long and short exchange capital cost rates on a regular basis.

BW does not charge any capital costs; capital costs are charged among users.

Capital cost rate limit

BW caps capital cost rate to ensure max leverage is available.

To achieve this, BW adds two restrictions:

1) 、The absolute capital cost rate max limit is (initial margin - maintenance margin) * 75%.

For example: Assuming that initial margin is 1% and maintenance margin is 0.5%, then the max capital cost rate is (1% - 0.5%) * 75% = 0.375%.

2) 、The capital cost rate shall not change more than 75% of the "maintenance margin" in the "capital interval" range.

1. Forced Liquidation 

BW contracts offer high leverage, and in order to maintain positions, your position margin must be greater than the minimum maintenance margin required by the contract. 

If you are unable to meet the margin requirements:

Isolated Margin Mode: Your contract position will force the position to be closed and the position margin of your investment will be lost.

If the liquidation is triggered, BW will cancel all unfilled orders for the contract to release the margin and maintain the position.

If the maintenance margin requirement is not met at this time, the position is taken over by the bankruptcy price.

1.  Risk Reserve System

Forced liquidation is a liquidation order at bankruptcy price.

Bankruptcy price is the marked price when position margin balance (including unrealized earnings and losses) is only equal to the closing commission fees.

If BW can close the position at a price better than the bankruptcy price, additional capital will be added to the risk reserve.

If BW cannot liquidate at bankruptcy price, Bit-Z will spend the risk reserve and try to liquidate in the market.

Therefore, there is no risk of wearing your contract position. You will lose at most of your principal.

1. Automatic Position Reduction System

When investors are forced to close positions, their remaining positions will be taken over by BW forced liquidation system.

If the forced liquidation position fails to liquidate in the market and when the fair price reaches the bankruptcy price, the automatic position reduction system will reduce the position of investors who hold the opposite position.

The priority of position reduction will be determined by leverage and profitability. Automatic position reduction will be carried out according to the bankruptcy price of the forced liquidation position.

At any time, your position in the sequence is displayed by an indicator. This indicator represents your priority in the queue with a 20% increase:

In the example above, when all "lights" are lit, it means that your position is at the highest percent. You may be deleveraged if you can't close your position in the market.

The priority of position reduction is calculated by earnings and leverage. Traders with high earnings and leverage will be deleveraged first.

The system separates long and short two directions and sorts from top to bottom.

(9)Overall Position and Independent Position

Overall position and independent position are two modes you can choose when trading contracts.

1. Overall position

Position margin reserves only the min required margin,

An insufficient part of the margin will automatically be added from the account balance to avoid position explosion.

In overall position mode, your max loss is All capital in the account.

Independent position

After you hold an independent position of contract, the margin allocated to the position is separated from the remaining margin in the account.

In an independent position mode, your max loss is the allocated margin to the contract position.

1. Possible Costs during a Perpetual Contract Transaction on BW Platform

Commission Fee

Bilateral charges. That is: once charges at the opening, and once at closing.

Commission fee = order contract value * commission fee rate

Capital Cost

Capital cost = nominal value of the position * capital cost rate.

Capital cost is generated every 8 hours at three-time points: 00:00 (UTC+8), 08:00 (UTC+8), and 16:00 (UTC+8).

When the capital rate is positive, long pays short. When the capital rate is negative, short pay long.

BW does not charge any capital costs; capital costs are charged among users.

Note: If you are in the right direction, you can receive capital costs from your counterpart.