Contracts and Pricing
Perpetual BTCUSD Contract
Overbit allows you to deposit Bitcoin and trade it against other instruments and currencies with leverage. The price of a contract is similar to the spot price, but you have the option to use leverage, which could reduce your cost of capital. The contract works in a similar way to CFD (Contract For Difference) contracts. It means you can go Long or Short on a larger amount of Bitcoin (or Bitcoin value equivalent) against another instrument such as USD, ETH, Gold (and more). You simply need to have enough funds to cover the margin (difference in overall price movement).
The BTCUSD contract’s underlying price is the Overbit Index. This is dynamically weighted over several exchanges. The weighting of each exchange is determined by the size of the order book for the price quoted at the time. BTCUSD is quoted in USD. Margin and PnL calculations are denominated in Bitcoin.
|USD Contract Value||Price * Quantity|
|PnL Calculation||(Exit Price – Entry Price) * Quantity / Mid-Price at Exit^|
^ Mid-Price at Exit = (Buy Price + Sell Price)/2 at the time of exiting the position.
Profit and Loss calculation example:
BTCUSD is currently at $5,000 and John believes it will go up in value. He wants to enter into a contract with 1 Bitcoin at 3x leverage.
A few days later BTCUSD goes to $5,500 and John closes the trade.
John’s profit is calculated as follows:
5,500 (Exit Price) – 5,000 (Entry Price) * 1 (Quantity) / 5,500 Exit Price = 0.09 BTC
If the market had gone down to $4,500 USD, John’s profit calculation would have been as follows:
4,500 (Exit Price) – 5,000 (Entry Price) * 1 (Quantity) / 4,500 Exit Price = -0.11 BTC
The loss is greater because of the inverse and non-linear nature of the contract. Conversely, if the trader was short then the trader’s profit would be greater if the price moved down than the loss if it moved up.
At Overbit we have developed our own unique method of pricing the market. For each instrument, we have selected exchanges with the highest real trading volumes. We then take a dynamically weighted average of the price as per the availability from each exchange’s order book. For example, if Exchange 1 has 100 BTC for sale at $4,000 USD and Exchange 2 has 150 BTC for sale at $4,010, then the calculated price is (100/250 * $4,000) + (150/250 * 4,010) = $4,006.
Subject to a user’s network speed, this price can update as much as 100 times per second.
Overbit operates an automatic partial liquidation policy for positions that are close to their maintenance margin. When an open position is getting close to the maintenance margin, the position is partially liquidated to allow more margin. This is also to prevent the position from completely closing.
To prevent auto liquidation process, it is recommended that traders use a stop loss where possible and have enough funds in their account to cover the maintenance margin.