The BitMEX Insurance Fund has added nearly thirteen,000 BTC in 2022, reaching a total of just over 33,491 BTC as of Dec. 30. This is equivalent to 0.xix% of the full Bitcoin in circulation, based on the data bachelor at Blockchain.com.

The fund, which the cryptocurrency commutation set up to ensure that liquidation orders related to leveraged positions are filled, ended 2022 with nearly 20,800 BTC. This ways that the fund has seen a 61% increment since the start of 2022.

How does the BitMEX Insurance Fund work?

Crypto derivatives exchange BitMEX prepare up the fund to give margin traders more certainty that they volition receive their winnings. Here's the logic behind the fund.

In leveraged trading, market place participants are immune to make bets that the cost of an asset will either rise or autumn in multiples (that could exist as high as 100x) of the amount they deposited. The thought is to dilate the potential profit for making the correct bet.

Hither are two leveraged trade scenarios.

Source: BitMEX

In the oversimplified instance higher up, Trader A, who has made the winning trade expects to make a turn a profit of $5,000 based on the $500 rise in Bitcoin cost multiplied by the 10 times leverage. However, since the losing trader's actual position is worth only $4,000, at that place's a $i,000 arrears for the winning trader.

As pointed out in a previous Cointelegraph commodity most a flash crash issue on Poloniex, traders in the traditional leveraged market place are required to pay for the loss or risk facing legal actions from the brokerage firm that offered access to the derivatives trading exchange.

For trading activities involving large financial institutions, in which the event of a default would significantly jeopardize the financial organisation, there are several layers of security. Traditional derivatives exchanges have large insurance funds that run across the billions.

CME, the world's largest derivatives exchange, has roughly $22 billion in its safeguard system. And in cases where the safeguard fund isn't sufficient to cover the defaulted corporeality, the exchange tin exert its ability to ask participating clearing members to assistance finance the defaulting members. And in farthermost situations, the regime could issue a bailout to the defaulting institutions, especially when the issue threatens economic stability.

Diverse financial experts and commentators have claimed that derivatives played a major function is the 2008 fiscal crisis, a period in which there were government bailouts to large financial institutions.

The detachment of the crypto market from the traditional fiscal space means that such robust security is unavailable to crypto margin traders. Therefore, unlike crypto exchanges have developed different mechanisms to offer some level of security. For BitMEX, this is the insurance fund.

Why has the fund been growing?

BitMEX has developed a system whereby the insurance fund grows in a liquid market, signaled past a narrow bid/inquire spread. Crypto derivatives analytics platform Skew found BitMEX to be the nigh liquid amidst the height crypto exchanges offering derivatives trading.

Skew has been tracking the primary perpetual swap bid/inquire spread for $ane million, $v million and $10 million. The other exchanges being tracked include Binance, bitFlyer, Deribit, FTX, Huobi, Kraken and OKEx.

The post-obit charts are from December. 24, 7:xxx a.m. GMT.

Major events around the fund in 2022

The high liquidity enjoyed by BitMEX, per Skew's enquiry, presents a plausible caption for why the fund has been growing. According to BitMEX:

"The Insurance Fund grows from liquidations that were able to be executed in the market at a price better than the bankruptcy toll of that particular position."

Still, there take been a few small day-to-solar day declines in the balance of the fund. The largest drawdown since the fund began over iii years ago happened on April 12, 2022, involving about $5.1 million worth of Bitcoin.

Cardinal facts effectually the fund

Criticisms

BitMEX has been widely criticized for the lack of transparency of its insurance fund. Criticism has ranged from how the exchange doesn't fully disclose all the trade variables, such as bankruptcy price, to traders.

Crypto publication The Block also noted that the BitMEX Insurance Fund lacks a known breakdown of how drawdowns are made per contract. This all has led some to suggest that BitMEX considers the fund an nugget on its rest sheet.

Competitor Deribit mentioned in a blog mail service that large insurance funds similar that of BitMEX could indicate an overly ambitious liquidation mechanism, which may reduce the incentive to pursue other market security innovations.

Other derivative insurance funds

At least three other elevation derivative exchanges have an insurance fund likewise: Deribit, Huobi and OKEx. Dissimilar BitMEX, which uses auto deleveraging to account for losses that its insurance fund tin can't cover, these other exchanges use socialized loss mechanisms to account for losses higher than their insurance fund balances.

The BitMEX Insurance Fund, notwithstanding, dwarfs the fund balances of these three other exchanges.

Every bit of Dec. 24, the OKEx Insurance Fund is worth most $46.three million, much lower than the $100 one thousand thousand increase seen past the BitMEX fund in 2022. Deribit said in June that its insurance fund had increased to 150 BTC, while Huobi's fund details are inaccessible.