Huobi DM, the leading digital asset derivatives trading platform of Huobi Group, today announced the launch of perpetual swaps, a new derivative product that enables users to better hedge risk and create leveraged arbitrage opportunities in volatile market conditions.
Similar to traditional futures contracts, perpetual swaps allow users to buy or sell assets at a specific price to hedge against market fluctuations. But compared to the feature that traditional futures contracts have predetermined expiry dates, perpetual contracts let users hold positions as long as they’d like—as long as they maintain their required margins.
“As we’ve recently experienced, sudden market swings can have a significant yet temporary impact on the broader financial ecosystem, but volatility itself is a very normal part of market cycle,” said Ciara Sun, VP of Global Business of Huobi Group. “Perpetual swaps provide traders another tool in their arsenal to capitalize on market movements to create arbitrage.”
At launch, Huobi DM supports inverse perpetual swaps, also known as coin-margined perpetual swaps, which are quoted in USD but margined and settled in a contract’s underlying digital asset. The trading platform currently enables BTC swaps and will add other major cryptocurrencies like ETH, EOS, and LTC in the near future.
Added Measures to Minimize Risks
To provide users with flexibility in trading strategy, perpetual swaps trading is supported with up to 125X leverage. As with any derivative product, risks are directly correlated to leverage. Huobi DM has implemented a number of risk control measures to help users minimize exposure and reduce the possibilities of liquidation and clawbacks—a common scenario in highly volatile trading conditions where profited users are required to pay certain percentage of assets beyond their committed capital.
All perpetual swaps require users to commit an initial margin as a guarantee when opening a position. To ensure positions are properly funded and maintained at all times, a funding mechanism anchors each position to the spot price of the corresponding asset and settles the contract every eight hours. Realized profits can be withdrawn after settlement but realized losses may bring about sharp decrease in margin ratio, which Huobi may require the user to commit additional assets to maintain the required margin balance. Otherwise, dramatic diminishment in margin ratio to 0% would finally result in liquidation.
In the event of huge decrease in margin ratio and frequent liquidation, Huobi DM’s new partial liquidation mechanism further protects users by gradually reducing a user’s position instead of liquidating it in full in a single event. The mechanism prevents the risk of sudden market swings that may otherwise trigger immediate liquidation of highly leveraged positions, causing extensive user losses.
In especially abnormal market conditions, a liquidation circuit breaker halts liquidation when extreme deviations between the liquidation and market prices are detected. Huobi DM also establishes a $500,000 insurance fund for each token it supports to help prevent clawbacks from negative balances and guarantee user profits, assuming the corresponding insurance fund is carrying a positive balance at the time of incident.
Sun added, “Perpetual swaps have been on our roadmap for quite some time, but we wanted to ensure we had the right risk controls in place before we made it available to users. With the recent launch of our partial liquidation mechanism and liquidation circuit breaker, we’re now able to give both retail and institutional traders a new way to harness arbitrage opportunities in a safe and secure trading environment.”