Yesterday, BitMEX introduced its 25x leverage perpetual swap for ETHBTC pair called ETHXBT. CEO Arthur Hayes wrote a "Swaps 101" that tries to explain how it works.
The basics of the product are that there is no expiration, so you can keep your position open forever, as if it were just a spot or margin position. Every day, instead of normal settlement or any expiration, the principal PNL is realized and ready for withdrawal and an interest payment based on the net Poloniex ETH and BTC lending rates is sent from traders who are long ETHXBT to traders who are short on ETHXBT.
A trader who is long ETHXBT contract on BitMEX will receive the ETH lending rate as an interest payment, and pay the BTC lending rate. On the flip side, traders on the short side of ETHXBT will receive the BTC lending rate and pay the ETH lending rate. Because of the supply and price difference between ETH and BTC, the net of the rate used to make the payment will almost always be positive for shorters on ETHBTC and negative for those who are long.
Example of Trading BitMEX ETHXBT Perpetual Swap
To give an example of how it works, let's say you are short ETHXBT, you have two ways to profit:
1) The interest payment you get at 12:00 UTC each day (positive most of the time when you're short).
2) The decline in the price, which will track spot market value
How much interest will you earn? Look at Poloniex for the reference, below is BTC lending rate:
And if you're short, you also have to pay the ETH lending rate, which will almost always be less than the BTC rate, so the net amount will be that you receive. But the payment will roughly equal what you see on Poloniex:
See the historical values of what BitMEX pays for ETH and BTC lending rates here:
If you are short, for example, 100 contracts at 0.02 ETHBTC, worth 2 BTC, then you would have gotten on Friday 0.1306-0.0217 = 0.1089% payment, or 0.002178 BTC. If you were long 100 contracts, you would have had to pay this amount to the short holders.
This is because you are borrowing at a higher rate in BTC and then investing at a lower rate at ETH if you are long ETHXBT, this makes it usually cost money to be leveraged long. Conversely, if you are borrowing ETH to go long BTC, you're paying a lower ETH rate to earn a higher BTC rate, and earning interest when leverage short ETHXBT.
It might seem daunting at first, but it's really as simple as just trading it as if it's spot or margin. You get daily PNL realisation as well as the interest rate payment (positive if short Ethereum, negative if long Ethereum -- most of the time).
Get 10% off fees trading this product and 100x leverage BTC contracts and more here.