Mutual insurance is a risk management tool for a perpetual contract. Traders holding perpetual contract positions on Bybit can purchase mutual insurance to hedge the potential loss. Premium paid for mutual insurance will be credited to Mutual Insurance Fund. If the insured perpetual contract position experiences loss, the trader can receive compensation from Mutual Insurance Fund.
Long Protection and Short Protection
A trader with a long BTCUSD position can purchase long protection to hedge against potential downside risk.
A trader with a short BTCUSD position can purchase short protection to hedge against potential upside risk.
1. Mutual Insurance Details
2. Purchase of Mutual Insurance
3. Insurance account
4. Insurance amount
5. Insured Price / Settlement Price
6. Mutual Insurance Payoff
7. Max Payoff
8. When to Settle
9. Mutual Insurance Fund
10. Mutual Insurance Premium
11. Auto-Renewal
12. Changes of insured Perpetual Contract Positions
13. Forced Early Settlement
14. FAQ
1. Mutual Insurance Details
|
Underlying Asset |
BTCUSD Perpetual Contract |
|
Types of Mutual |
Long Protection (for long BTCUSD position) Short Protection (for short BTCUSD position) |
|
Duration of Mutual Insurance |
2 hours, 12 hours, 48 hours |
|
Minimum Insurance Amount |
USD 500 |
|
Insurance Amount |
25% / 50% / 75% / 100% of BTCUSD perpetual contract position Maximum amount per mutual insurance order is USD 200,000 Maximum amount of mutual insurance per account is USD 1,000,000 |
|
Mutual Insurance Premium |
Black Scholes Option Pricing Model, adjusted by |
|
Mutual Insurance Fee |
Insurance Amount * 0.05% |
|
Mutual Insurance Cost |
Premium + Insurance fee |
|
Insured Price |
The BTCUSD Index price upon mutual insurance purchase |
|
Settlement Price |
The BTCUSD Index price upon mutual insurance settlement. |
|
When to Settle |
1) Insurance expires and settles automatically 3) Insured BTCUSD position gets fully liquidated. Mutual insurance settles automatically 4) Insured BTCUSD position gets partially liquidated. Mutual insurance settles automatically (if any) |
Remarks:
At present, Bybit mutual insurance support BTCUSD only. And it’s only available on PC web page.
2. Purchase of Mutual Insurance
Traders who have existing perpetual contract positions have the option to purchase mutual insurance which is available at the position tab. Traders will be able to purchase multiple mutual insurances with different amounts and duration by entering a separated transaction.
3. Insurance Account
In order to purchase mutual insurance, traders will need to transfer their BTC funds from the trading account to their insurance account.
Traders must be aware of how the insurance account operate differently when purchasing insurance or when auto-renewal takes place on the 2 margin mode;
Isolated margin mode:
The system will automatically deduct from the trading account should there be insufficient funds in the insurance account to pay for the insurance premium. This is achievable as taking up margin in isolated margin mode will not affect the contract position liquidation price.
Cross margin mode:
The system will NOT deduct from the trading account if there are insufficient funds in the insurance account. Instead, the transaction will be canceled. This is not achievable as taking up margin in cross margin mode will affect the contract position liquidation price.
Note: Trader would still be able to manually transfer BTC from their trading account to their insurance account in cross margin mode to purchase insurance, but please be aware that this would affect the liquidation price of the open position.
4. Insurance amount
Insurance amount refers to the value of a perpetual contract position to be insured. Traders can choose to purchase 25%/50%/75%/100% of the insurable amount per insurance order.
Examples: A trader holds 20,000 BTCUSD short contract at $8,000, and decides to purchase 25% short protection. The corresponding insurance amount will be 5,000. Once purchasing this 5,000 insurance, the remaining insurable amount will be 15,000.
Subsequently, the trader may want to purchase more short protection and selects 100%, which is 15,000 now, to achieve full coverage of all 20,000 BTCUSD short position.
5. Insured Price / Settlement Price
Insured price refers to the BTCUSD index price upon purchase of mutual insurance. As the index price fluctuates in real-time, the insured price may deviate from the latest index price a trader observes when placing the insurance order.
A rejection message will appear when the displayed insured price at the time of submission compared to the insured price received by the system has more than 2% price deviation.
This feature prevents the insurance from getting filled at an insured price that is outside of their intention as price is always fluctuating in the market, there will be volatility due to irrational or huge market movement conditions as such this act as a safety mechanism to protect our traders.
The settlement price refers to the index price upon mutual insurance settlement.
6. Mutual Insurance Payoff
5.1. When Settlement Price > Insured Price
Long Protection is invalid and the payoff is 0.
Short Protection Payoff = Insurance Amount * (1/Insured Price - 1/Settlement Price)
5.2. When Settlement Price < Insured Price
Short Protection is invalid and the payoff is 0.
Long Protection Payoff = Insurance Amount * (1/Settlement Price - 1/Insured Price)
5.3. When Settlement Price = Insured Price
Both Long Protection and Short Protection are invalid and the payoff is 0.
Where
When insurance expires, settlement price = BTCUSD index price upon expiration.
When a trader manually settles mutual insurance, settlement price = BTCUSD index price upon settlement
When the insured position gets liquidated, settlement price = BTCUSD index price upon liquidation
7. Max payoff
The highest settlement price of short protection and lowest settlement price of long protection are determined by the expected liquidation price of the insured BTCUSD position upon mutual insurance purchase.While a BTCUSD position is insured, its leverage may be adjusted, extra margin may be appended or withdrawn, position may be adjusted, etc. These actions may change the liquidation price of the insured BTCUSD position. However, the highest/lowest settlement price will remain the same - the expected liquidation price upon insurance purchase.
Formula for Max payoff
Max Payoff of Long Protection = Insurance Amount x (1/Expected Liquidation Price of Insured Position Upon Insurance Purchase - 1/Insured Price)
Max Payoff of Short Protection = Insurance Amount x (1/Insured Price - 1/Expected Liquidation Price of Insured Position Upon Insurance Purchase)
Examples:
A trader holds 10,000 long BTCUSD position and decides to get 100% insured. When he places the order to purchase long protection, the index price is $7,000 the expected liquidation price $6,000. If BTCUSD price declines, the long protection will cover the loss up to price decline to $6,000.
Note that different traders may place insurance orders of the same size at the same time. However, as the insured BTCUSD positions may have different liquidation prices, the insurance premium may be different.
8. When to settle
Mutual Insurance will be settled in any of the following conditions below are met;
A. Mutual insurance expires after 2 hours, 12 hours, or 48 hours. The settlement will be triggered immediately.
B. Trader manually settles the mutual insurance. As long as the insurance is effective, the trader can settle it anytime.
C. The insured BTCUSD position gets fully liquidated. All corresponding mutual insurance will be settled immediately.
D. The insured BTCUSD position gets partially liquidated. The corresponding insurance amount, if any, will be immediately settled. Once settled, the payoff of the mutual insurance, if any, will be credited to the trader’s insurance account immediately.
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9. Mutual Insurance Fund
The Mutual Insurance Fund is the settlement fund of Mutual Insurance service. All the mutual insurance premiums will be credited to Mutual Insurance Fund. All the payoff of mutual insurance will be covered by the Mutual Insurance Fund.
The balance of the Mutual Insurance Fund will be displayed on Bybit Data at 0.00UTC daily.
Mutual Insurance Fund Balance = Initial Balance + Premium Received - Settled Payoff - Estimated Payoff
Bybit will inject 200 BTC as an initial balance of Mutual Insurance Fund.
10. Mutual Insurance Premium
Mutual insurance premium is primarily derived by the Black Scholes Model.
The premium will be higher for larger insurance amounts, higher volatility of index price, higher insured price of long protection (the lower insured price of short protection), larger maximum payoff and longer insurance duration.
The volatility of index price is calculated as a weighted average of historical volatility over the insurance duration, 1-week, and 2-weeks.
On top of the Black-Scholes model, the premium will be further adjusted by the following coefficient variables.
a) Mutual Insurance Fund Coefficient
Mutual Insurance Fund Coefficient =Reference balance of mutual insurance fund / Balance of mutual insurance fund.
The reference balance of the mutual insurance fund is determined by the total sum of the current insurance amount.
b) Maximum Payoff Coefficient
This value is determined by the total amount of maximum payoff of all mutual insurance.
c) Short-Term Insurance Sentiment Coefficient
This value is determined by the ratio of the purchase amount of long protection or short protection over 1 minute and 15 minutes versus the moving average.
We will be using the data and feedback we received from the community to further adjust the various coefficient in order to provide a fairer premium pricing.
11. Auto-Renewal
Traders have an option to auto-renew mutual insurance with the same duration, amount, and direction. The auto-renew function can be activated and deactivated anytime.
Upon auto-renewal, the following conditions must be fulfilled.
- The total insurance amount after the renewal is not more than the corresponding perpetual contract size;
- The direction of the perpetual contract remains the same;
- Sufficient premium to cover the renewal insurance order.
- Insurance has not reduced in quantity due to partial liquidation.
Please note that the premium for insurance renewal may be different from the initial premium paid, subjected to changes in index price, volatility, liquidation price, etc.
12. Change of Insured Perpetual Contract Positions
- When a trader increases his perpetual contract position: Existing mutual insurance is not affected. The trader may purchase extra mutual insurance to cover the increased position.
- When a trader decreases his perpetual contract position: Existing mutual insurance is not affected. Mutual insurance renewal may be affected.
13. Forced Early Settlement
In the event where the mutual insurance fund is overly depleted, mutual insurance may be forced early settled.
All the outstanding mutual insurance will be ranked as follows for forced early settlement priority. Each mutual insurance order is ranked independently if a user holds multiple insurance positions.
Forced Early Settlement Ranking = InsuranceAmount * Estimated Payoff/ Premium
The estimated payoff is the expected insurance compensation if the mutual insurance is settled at the current index price.
Total Payoff Ratio (TPR) = Total Estimated Payoff/ (Mutual Insurance Fund Balance + Total Estimated Payoff)
- When TPR ≥70%, Bybit will send a risk alert to every user with an outstanding mutual insurance position.
- When TPR ≥ 80%, starting from the highest-ranking, 50% of the total insurance amount will be forced early settled. The settlement price is the index price when TPR%reaches 80%.
- When TPR ≥90%, all outstanding mutual insurance will be forced early settled. Mutual insurance service will be suspended for 24 hours.
- Bybit may inject capital to the mutual insurance fund to relaunch the service.
14. FAQ
To find out more about mutual insurance, please click here.