Unlike crypto-margined futures, the cash-margined contracts offer a linear payoff, making traders less vulnerable to liquidations. By godbole17
The bitcoin derivatives market has undergone a significant structural change in the past 18 months, making the asset class less vulnerable to volatility-inducing liquidation cascades.
"This acts to reduce the probability of an amplified liquidation cascade while also demonstrating the growing market demand for stablecoin collateral," Glassnode's analyst James Check said in a weekly note sent to subscribers. Large liquidation cascades were quite common before mid-2021 when crypto-margined were more popular than cash-margined ones.
Essentially, the long position bleeds faster as bitcoin becomes cheaper relative to USD. Further, the collateral, BTC, also loses value, compounding losses. As such, the margin required to keep the position increases sharply. If the entity fails to provide the same, the position is liquidated. The blue line, representing the percentage profit and loss from a long position in a crypto-margined contract, shows a non-linear payoff. In this case, the trading entity loses more when the market drops and earns less when the market rallies. The latter happens because, after the market rally, BTC itself becomes costlier relative to USD.
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