macrocephalopod

Got left on the cutting room floor. Basically, you need to look at the liquidation rules of the exchanges. For those with auto-deleveraging (e.g. Kraken), the most highly levered shorts are the ones who get closed first. So if you keep your leverage super low, you’re “safe"

With the floating rate trade (e.g. long BTC / short perpetual), the risk is that all the demand disappears right after you put the trade on and you earn nothing. That’s a timing risk element of this.

But in a big crash, these premiums invert and the shorts can end up owing the funding rate to the longs. If you’re short the fixed maturity and the premium inverts, that’s an opportunity to close at a higher return.

Thinking more if there is a gap down, what’s the risk your short futures can’t be monetized because your counter-party failed and the exchange wasn’t able to close their position before they blew through their collateral?

TL;DR: It varies by exchange. They use partial liquidations, insurance funds, designated “market makers” who agree to step into positions, and auto-deleveraging rules (close shorts).

The similarities between this and 2003-2008 are fascinating...

Go on…