Hodor

Cryptofacilities Leverage Question

21 posts in this topic

So I was perusing the Crypto Facilities website tonight on my phone....and I noted two things, one good, one bad. 

Bad:  They don't allow US traders to trade.  So I can't use them. 

Good (maybe?):  They allow traders to trade with 50:1 leverage. 

So am I understanding this correctly:  If I happen to live in England, and I have a spare $10,000 (or Pounds or Euros), I can effect a purchase of $500,000 worth of XRP?  Or am I simply betting that $500,000 worth of XRP will go up, and there is no actual purchase in the background.  (I'm simply making a bet on the price).  If anybody can clarify, that would be good. 

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You are betting that $500,000 worth of XRP will go up. But if you think about it from Crypto Facilities point of view, how can they manage the risk that XRP will surge in price other than either acquiring $500,000 worth of XRP or balancing you out against others who short XRP?

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To trade XRP/USD futures at Crypto Facilities you first need to credit your account with ripples (XRP), so you need at first to purchase XRP. Then you can trade with 8x leverage against other speculators. Crypto Facilities by them self do not enter any trades, but to my best understanding are obligated to close positions if you or your counter party does not have sufficient funds to keep a leveraged position.

So, XRP price movement bigger than 13% (or my be even less) may provoke liquidation of loss, and therefore profitable counter-positions.

Not very fun.

Duke67 likes this

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4 minutes ago, attn said:

Crypto Facilities by them self do not enter any trades

Source?

Do you mean positions (in derivatives terminology)?

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Quote

If you buy, we bilaterally match you with a seller, and if you sell, we match you with a buyer. If you make a profit, this profit will come from you counterparty. If you make a loss, that loss will go to your counterparty. We manage the margin of our and your counterparty in real-time and transfer any profit or loss.

...

Any bitcoins or Ripple XRP that sit in your cash accounts do not count as margin, meaning you cannot lose them if a trade turns against you.

Deposits made to one of your margin accounts count as margin and could be lost if a trade turns against you. Margin accounts are separate for each instrument to assure that there is no spill-over effect between positions in different instrument. For instance, assume you have a long position in the Bitcoin-Dollar Futures, as well as a position in the Ripple-Dollar Futures. If the bitcoin price declines, your Bitcoin-Dollar Futures position may get liquidated but this will have no effect on your position in the Ripple-Dollar Futures.

Margin accounts are completely independent - if you are margin called in one account, this has no effect on the other margin accounts. You can decide yourself how much margin you want to allocate to each margin account (minimum margin requirements apply).

https://www.cryptofacilities.com/derivatives/resources

Actually trades against fully leveraged counterparty can be closed when counterparty hits [unknown] maintenance margin threshold.

Quote

Positions are liquidated if either the portfolio value of a margin account falls below Maintenance Margin and is still below Initial Margin 24h later or if portfolio value falls below the Liquidation Threshold.

Positions are liquidated by submitting an immediate-or-cancel limit order to the market. The limit price of this order is chosen such that if the order is matched, the remaining portfolio value of the margin account will not be negative. A liquidation in one margin account will not affect any other margin accounts. /.../

If a position cannot be liquidated (for example due to lack of demand on the market) and portfolio value falls further to the Termination Threshold, all open positions in the affected margin account are terminated at the same time. This means that the contracts between you and your counterparties end and that the remaining portfolio value of the margin account is transferred to your counterparties. This transfer is managed by choosing the termination price such that the remaining portfolio value will be zero. A termination of one margin account will not affect any other margin account. /.../

Equivalently, if a position of one of your counterparties is terminated, the termination price is chosen such that you receive their remaining portfolio value.

The termination mechanism encourages market participants to sufficiently collateralize their margin accounts. It also compensates any party whose position has been terminated as a result of their counterparty not posting sufficient margin. For Futures, Termination Thresholds are chosen such that they cover approximately a 1 hour 99th percentile adverse price move. Therefore, if a trade closes because your counterparty is terminated, the compensation payment should enable you to replace your trade with no loss (and potentially a profit).

https://www.cryptofacilities.com/derivatives/resources#Margining

Not fun at all, because so far XRP/USD futures trade at huge spreads. Crypto Facilities by themself need liquidity providers market makers.

 

Edited by attn

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3 hours ago, attn said:

bigger than 13%

So basically a price movement that would entirely eat the leverage ratio.  That kind of makes sense.  But then, is there any absolute time element?  i.e., "I've got to close out my trade in two weeks if there's no movement?"

 

2 hours ago, attn said:

so far XRP/USD futures trade at huge spreads

I'm not too worried on the third day of trading.  :) When an exchange starts, it will usually have low volume until the trading picks up.  Then the spreads will start to converge quite a bit.   

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Just now, Hodor said:

I'm not too worried on the third day of trading.  :) When an exchange starts, it will usually have low volume until the trading picks up.  Then the spreads will start to converge quite a bit.   

Yeah, but Cryptofacilities could do some market making by themselves in the meanwhile.

I'm not sure why everyone is trying to avoid this. You have to "bootstrap" trading somehow.

 

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23 minutes ago, Duke67 said:

8:1 is very dangerous and 50:1 is a total disaster guaranteed.

Leveraged trading = the fastest way to ZERO.

Careful.

Unless you need or even are forced to buy and hold a bunch of XRP. Than those instruments can help to lower the financial risks in case XRP makes a nose dive.
.... Like for banks stepping into Ripple....
This kind of products are not for the average Joe... indeed.

Edited by kanaas

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Highly-leveraged trading on a volatile asset is a very quick way to make, or lose, a lot of money.

I strongly urge people to avoid trading with leverage unless they have a very good understanding of the consequences of leveraged trading. It's easy to do very, very badly even if the market does precisely what you think it's going to do!

There's a great story (it may be illustrative, it may be real, I don't know) of a group of guys who predicted that a certain index fund would go up during an industry conference. Wanting to make even more money than just buying an indexed fund, they bought with leverage -- a fund that would go up 5% if the index went up 1% and go down 5% if the index went down 1%.

A few days later, they were right, the index had bounced around and settled up 2%. They expected to be up 10%. Sadly they were down, way down.

Why? Say the market went down 10% and then up 13%. If you were in an index fund, you'd be up about 1.7%. But when the market goes down 10%, the leveraged fund goes down 50%. You need to go up 100% after a 50% drop just to break even! If you go down 5*10% and then up 5*13%, you're down 17.5%. Ooops.

What did they do wrong? After the 50% drop, they needed to adjust their position. Say they had invested $100. After the 50% drop, they'd be down to $50. Had they invested another $50, they would have been back to $100 and the 13% increase would have made them $65, giving them a net profit of $15. That's what they expected, 3% increase, $100 investment, 5x leverage, should be $15 profit. But not if you don't replenish losses.

If you reinvest profits or don't replenish losses, leverage can hurt you badly. A loss after a gain is bad because you've invested more money in the losing transaction than the gaining one. A gain after a loss is bad because, again, you invested more money in the losing transaction than the gaining one.

rippleric, digitalis, Dizer and 6 others like this

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7 hours ago, kanaas said:

Unless you need or even are forced to buy and hold a bunch of XRP. Than those instruments can help to lower the financial risks in case XRP makes a nose dive.
.... Like for banks stepping into Ripple....
This kind of products are not for the average Joe... indeed.

Exactly - not for the average person. I even think that unless there is no real value coming into these instruments from banks, then this leveraged trading will INCREASE volatility in the near term. Average normal investor can't beat neither big players nor machines.

You have been warned.

Edited by Duke67

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Well, to avoid leveraged loss situation, described by JK, you can only trade XRP without leverage. Because ripple has 50% downside potential any moment.

If you use leverage, (like me), you are gambling.

If you are gambling on platform, which even not informs you about a size of already opened positions, your are going to be patsy.

Be safe, friends.
 

Edited by attn

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There has to be a stop-gap workaround for the lack of accessibility in the US. The best I can come up with is another middle man, some sort of agent that can take direct payments in the US and transfer them to EU or elsewhere (perhaps has a standing account at EU based exchanges/ gateways like Gatehub or CF and can place orders on behalf of US residents). The EU companies don't have to deal with the US system directly and US residents get access and the middle man takes a cut.

 

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