How to trade a crypto composite index

The BBCX Composite Index of Bitcoin, Litecoin, and Ethereum is a rare example of a tradable crypto index futures product built by a third party for a host exchange. The BBCX was built by Brave New Coin’s market data team for the BTSE exchange.

An ‘institutional-grade’ index product, the BBCX enables crypto futures trading with the same methodology and reliability of traditional futures contracts. It is one of the first crypto indices to track multiple assets across multiple pricing sources at sub-second frequency.

This article provides a high-level tutorial on how to trade the BBCX index at the BTSE exchange.

Sign-up

Traders can select a fiat currency at the beginning of sign-up – this will be the quote currency in your trading pairs. Crypto deposits and withdrawals are possible without KYC, however, to trade with fiat or exchange USD into a USD stablecoin, KYC must be verified.

The BTSE wallet view of available spot currencies

Adjusting risk limits

A ‘Risk Limit’ can be set for the maximum-minimum amount of contracts in a trade. A higher risk limit allows for more contracts and requires a higher margin percentage. This higher margin requirement means that your position is more likely to be liquidated as the liquidation price moves closer to the current market price i.e. your stop loss in ticks becomes tighter.

Maximum Risk Limit setting on the BTSE

Risk Limit does not equate to leverage. Lower leverage means that a position is less likely to be liquidated – traders can adjust leverage up or downwards by adjusting the contract order size accordingly. Traders can lower the leverage by transferring more margin collateral to their wallet – to calculate the leverage simply divide the notional position size by your wallet collateral value.

This sets the total number of contracts one can trade for a product and allows traders to manage position size and risk. For the BBCX the maximum number of contracts that can be traded per account is 500,000, and the minimum is 50k contracts. Each contract is worth approx $1.

Minimum Risk Limit setting on the BTSE

Adjusting the risk limit by 50k increments raises the maintenance and initial margin requirements by 0.5% each time.

The minimum risk limit (50k) requires an initial margin of 2% and maintenance margin of 1.5% i.e. if a trader’s maintenance margin goes above 1.5% of their notional position size, the position will be liquidated. On the other hand, using the maximum (500k) Risk Limit requires a 6.5% initial margin and 6% maintenance, thereby pushing the liquidation price closer to the entry price.

Adjusting the leverage

The Risk Limit also sets the leverage capacity a trader can take on for one product.

A lower leverage implies a higher initial margin percentage for outstanding orders, this initial margin reduces the available balance in your wallet, and moves the liquidation price towards the current market price.

It’s useful to keep in mind the margin requirements on the notional size of a position. Below is a table of the margin requirements and the corresponding leverage size. For example, if the notional position size is $1000 at 20x leverage, a trader will be required to post $50 margin as collateral. If there is a 4.5% maintenance margin on the position your P/L cannot exceed $45 or it will be liquidated. Once the balance is equal to or less than the maintenance margin, the position will be liquidated.

There are two types of margin options available to BTSE futures traders. These are called Cross Margin, and Isolated Margin.

Cross = uses the entire account as collateral

Isolated = collateral fixed per individual position

Cross Margin takes in the size of an entire account across all wallets. So if a trader has ETH, USD, and BTC the margin requirement will use the USD value of all currencies across all wallets as collateral. This will provide more leeway for leverage and to adjust stop losses.

Isolated Margin uses the dollar value of just one asset from the selected wallet (e.g. 1 BTC = $9,000) to maintain the margin. Because it draws on one asset as collateral it gives a trader less leeway for leverage and position sizing.

The ‘high-frequency’ engine behind the BBCX

The BBCX index is weighted by three assets, BTC (60%); ETH (33%) LTC (7%). The prices are sourced from five constituent exchanges BTSE, Kraken, Bitstamp, Coinbase Pro, and Bitfinex.

The BBCX index dashboard from Brave New Coin shows the price of the index in the top chart and latency lag in the bottom chart

The BBCX index engine ingests hundreds, sometimes thousands, of bits of orderbook data per second from five indepedent pricing sources to calculate the index value. The index is then streamed to BTSE with an average lag of below 100 milliseconds. This high-performance low-latency set up is optimized for high-frequency and algorithmic trading.

An important separation

Brave New Coin continually monitors the BBCX index and the calculations behind it. Details of the methodology and constituent exchanges that make up the index are provided here.

Keeping a separation between the BBCX index and the BTSE exchange is important so that traders can trade the index with confidence. The separation protects against bias, making the BBCX an objective and transparent index that represents the overall market movement of crypto’s top three assets, condensed into one price.

This arm’s length relationship between the index builders and the exchange aids price objectivity. Brave New Coin is tasked with running and developing the numbers and calculations for the indices (the BTSE-BNC Basket index family), while BTSE oversees the actual order book and product trading based on those indices on its exchange.

On the futures trading side, BTSE maintains the operational, security, and customer support functions.

A tutorial on how to trade the BBCX is available on the BTSE website.