At their core, derivatives are financial instruments that derive their value from an underlying asset, such as cryptocurrencies. On OX.FUN, you primarily encounter futures - a type of derivative that allows you to speculate on the future price of crypto assets.

Understanding basic concepts surrounding derivatives is key to becoming an effective trader on OXFUN - so let’s get started.

Understanding Futures Contracts

Futures are a type of derivative which represent agreements to buy or sell a particular asset or commodity at a predetermined price at a specific time in the future. Unlike traditional buying and selling (i.e. the spot market), futures allow you to speculate on the price movement of a crypto asset without actually owning it.

Types of Derivatives on OXFUN

On OXFUN, the focus is on Quanto Perpetual Futures. Perpetual futures contracts do not have an expiry date, meaning they can be held indefinitely as long as the maintenance margins are met. They allow traders to leverage their positions significantly, amplifying both potential profits and losses.

Now the ‘Quanto’ aspect of the name refers to a type of futures contract where the underlying asset is denominated in one currency, such as Bitcoin or Ethereum, but the contract itself is settled in another currency, in this case $OX.

This setup provides an additional layer of speculation—beyond the price movement of the underlying asset, you're also speculating on the exchange rate between the two currencies. For more technical details regarding Quanto Perpetual Futures on OXFUN, please refer to this support article. 

How Leverage Works

On OXFUN, when you enter into a derivatives contract like a Quanto Perpetual Future, you're not required to pay the full value of the position upfront. Instead, you post a fraction of the position's value as margin.

This fraction or "leverage ratio" determines how much larger your trade can be compared to your initial investment. To find the leverage/margin ratios of particular assets, please refer to this support article. 

Example of Leverage on OXFUN

Imagine you want to leverage your position in Bitcoin, which is currently trading at $20,000 per BTC. If OXFUN offers a leverage of 10:1, this means for every $1,000 of your own money, you can hold a position worth $10,000 in Bitcoin. Here’s how it works:

• You deposit $2,000 as margin.

• With 10:1 leverage, your $2,000 allows you to control a $20,000 position in Bitcoin.

• If Bitcoin’s price increases by 5%, your position would gain $1,000 (5% of $20,000), effectively doubling your initial investment. Conversely, a 5% decrease would mean a $1,000 loss, wiping out your initial margin.

How Margin Works

Margin is a critical aspect of derivatives trading on OXFUN, serving as the collateral that enables traders to hold leveraged positions.

Margin is essentially the amount of funds you need to deposit to open and maintain a leveraged trading position. It acts as a guarantee for the exchange that you can cover any losses your position might incur.

Types of Margin on OXFUN

1. Initial Margin: This is the minimum amount you need to open a position. It's a percentage of the total trade value and is set to ensure that traders have enough skin in the game.

2. Maintenance Margin: This is the minimum amount you need to keep in your account to keep a trade open. If your account balance falls below this level due to trading losses, OXFUN will issue a margin call.

Example of Margin Use

Suppose you want to open a position in Ethereum perpetual futures. The total value of the position you want to control is $10,000. If the initial margin rate is 10%, you must deposit $1,000 to open this position.

Scenario of a Margin Call

• Example: Continuing with the Ethereum futures, let's say the market moves against you, and the value of your position drops by 15%. Your $10,000 position is now worth $8,500, and your $1,000 margin is insufficient to cover the maintenance margin requirement.

• Action: You will need to deposit additional funds to meet the maintenance margin requirement. If you fail to meet this requirement, your position may be liquidated to cover the loss.

Importance of Margin Management

Effective margin management ensures that you do not overextend your financial exposure and can sustain potential market downturns without facing immediate liquidation. This includes monitoring your positions regularly and understanding when you might be getting close to a margin call.

By maintaining adequate margins and understanding how they interact with market movements, traders on OXFUN can better manage their risk and capitalize on market opportunities without undue exposure to potential losses.

Ready to jump in? Learn how to place your first trade on OXFUN here.