Using BTC as collateral for a derivative is effectively a double whammy, according to analysts.
The contracts offer a non-linear payoff, bringing traders to their position-liquidation point faster than cash-margined contracts.
Futures are leveraged products, allowing traders to maximize exposure for a deposit at the exchange, known as margin, which is a small percent of the contract size. The exchange provides the rest of the value of the trade. The renewed interest in BTC-margined contracts means potential for volatility-boosting liquidations cascades, according to research provider Blockware Intelligence.
So, not only does a long position bleed as bitcoin's dollar-denominated price drops, but the collateral also loses value, compounding losses. That, in turn, results in a relatively quick margin shortfall and potential liquidation.The trend is worrying in a sense that should coin-margined contracts become dominant, we may see frequent volatility-boosting liquidations cascades.
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