On August 21, Huobi DM revealed that it has introduced real-time settlement for BTC contracts, an industry first. The news is more significant than it may at first appear, for it unlocks capital that was hitherto out of reach to traders upon profitably exiting futures contracts. Derivatives exchanges, including Huobi DM, have always provided daily or weekly settlement. The switch to real-time settlement has the potential to be a game-changer for the thriving crypto derivatives industry.
The Rise and Rise of Derivatives
The rise of Huobi DM’s derivatives platform has outpaced that of the broader market, which has seen a huge upswell in volume over the past 12 months. Since entering the fray in late 2018, HBDM, as the exchange is sometimes abbreviated, has accrued close to $700 billion in volume. While the bulk of this has been absorbed by BTC, traders have also gone long and short on seven other markets in the form of BCH, ETH, EOS, LTC, XRP, TRX, and BSV, all of which are available as weekly, bi-weekly and quarterly contracts.
The number of margin exchanges offering crypto derivatives has proliferated in 2019 thanks to a combination of new arrivals and existing heavyweights rolling out their own margin products. Huobi DM, which consistently ranks in the top three for derivatives volume, will be hoping its real-time settlement can propel it into a league of its own, at least until the competition catches on. Instant settlement of leveraged contracts is more complex than it may seem, with strict risk management controls necessary, coupled with an advanced trading engine.
Developing Real-Time Settlement Takes Time
All reputable derivatives exchanges operate an insurance fund; a reserve of BTC that can be dipped into in the event of an emergency. Although such emergencies are rare, they can occur when high market volatility results in losses through unfulfilled liquidation orders. Without an adequate insurance fund in place, these losses would otherwise have to be clawed back from the profits of traders, a procedure that would be enforced before their remaining funds would be made available to withdraw.
Due to the introduction of real-time settlement, Huobi DM will no longer be in a position to enact such a move, even if it wished to. The derivatives exchange is confident of the risk reduction and trader protection measures it has built-inbuilt in, however, pointing to an insurance fund that exceeds 1,000 BTC and another 20,000 coins jointly held with parent exchange Huobi. This is further bolstered by an array of risk control mechanisms that incorporate price, position, and order limits, coupled with real-time market monitoring to detect signs of possible manipulation.
Freeing Funds from Derivatives Limbo
With the real-time settlement now the norm for BTC contracts, Huobi traders can withdraw their funds the moment they close a contract, with the only potential deductions coming in the form of floating losses and frozen margin. Up until now, traders have frequently found themselves unable to access funds for days, causing them to miss out on major market action or token sale opportunities occurring elsewhere.
The increased liquidity that instant settlement will bring to Huobi DM users will be instantly felt, given the platform’s dominance of the derivatives space. Last month alone, just shy of $180 billion of trading occurred on HBDM, making the exchange a veritable giant among derivatives platforms. Compared with the fixed programming of BitMEX, whose contracts, products and features have scarcely changed over the past 12 months, the dynamic Huobi DM has shown a willingness to experiment and innovate.
This week, it kickstarted its BSV contracts with a $50,000 airdrop, and it’s also extended an open invitation to VIPs of other exchanges, who can start at the same elevated tier upon signing up. With new crypto derivatives platforms springing up, and established ones also experimenting with margin, competition is getting intense. Huobi DM will be hoping its provision of real-time settlements will allow it to stay a step ahead of the chasing pack.
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