Trading in Derivative Products (as defined in the Derivative Terms of Service) entails significant risks of financial loss. You should not commit funds to trading in Derivative Products that you are not prepared to lose entirely. Market prices for Derivative Products can be volatile and highly unpredictable. Losses on a position in a Derivative Product can occur quickly and be total and immediate. Whether the future market price for a Derivative Product will move up or down is a speculation and unknowable. The leverage available in trading Derivative Products allows you to establish a larger market position than an unleveraged position and therefore exposes you to a risk of greater loss than an unleveraged position.
You should not engage in trading in Derivative Products unless you understand the Derivative Product and its risks. This Derivative Products Risk Disclosure Statement discusses some of the principal risks of trading in Derivative Products, but it does not and cannot describe every risk or consideration involved in holding, trading, or engaging in margin financing or margined transactions in Derivative Products. This Derivative Products Risk Disclosure Statement utilizes certain terms that are defined in the Derivative Terms of Service. Please consult the Derivative Terms of Service for further information regarding those terms.
Risks of trading Derivative Products include, but are not limited to, the following:
1. Derivative Products Market Risk: Derivative Products are new products. There is little experience with these markets from which to judge how they will behave in the future.
You should pay close attention to your market positions and holdings. Market positions in Derivative Products can be impacted by sudden and adverse shifts in market trading and pricing. Under certain market conditions, it can be difficult or impossible to protect against the risk of loss from open Derivative Product positions because it may not be possible to enter into transactions, post Margin Collateral, or liquidate positions when desired without significant losses. Contingent orders, such as “stop-loss” or “stop-limit” orders, if permitted at all, may not necessarily limit losses to the expressed amount, and market conditions may make it impossible to execute an order or to obtain the stop price.
Under certain market conditions, Derivative Products may trade at prices that do not correlate or are inconsistent with the prices of the underlying Reference Token Pair. BFXD makes no representations or warranties about whether a Derivative Product will always continue to trade. Any Derivative Product is subject to delisting without prior notice or consent.
2. Market Risk Related to the Reference Token Pairs: In addition to the pricing risks in the markets for Derivative Products, there are separate risks of loss from Derivative Products related to the pricing of the Reference Token Pair underlying the Derivative Products. Those separate risks also can affect the pricing of the Derivative Products. Market participants may treat the market value of the Reference Token Pairs as a material component and risk to the valuing and financial performance of Perpetual Contracts.
In assessing the risks Reference Token Pairs can have for Perpetual Contracts or any other Derivative Product, it is important to understand that Reference Token Pairs are new products without a substantial market history. There is little experience with how the markets for them will behave in the future, and past market behavior provides no assurance or guarantee of future market behavior. Market prices for Reference Token Pairs can be volatile and highly unpredictable. Whether the future market price for a Reference Token Pair will move up or down or even sustain a market value is speculation and unknowable.
BFXD makes no representations or warranties about whether a Reference Token Pair or single Digital Token will trade in the Bitfinex.com peer-to-peer Digital Token trading market. Any Reference Token Pair or single Digital Token that trades in the Bitfinex.com peer-to-peer Digital Token trading market is subject to delisting without prior notice or consent.
3. Risk of loss from BFXD’s Use of the BFX Composite Index (BFXCI) to set the Mark Price, determine when a position will be forcibly liquidated, and determine Funding Payments: The Mark Price and the calculation of the BFXCI used to set the Mark Price (a) are material components for determining when Funding Payments for Perpetual Contracts will be required and how much the Funding Payments will be and (b) are the basis for determining the Forced Liquidation Price for a Perpetual Contract position and when the Forced Liquidation Price is reached. Accordingly, in assessing the future financial performance and risk of loss of an open position in a Perpetual Contract, you should pay close attention the Mark Price and the ongoing valuation and behavior of the BFXCI and what effect it could have on the performance of and risk of loss from the Perpetual Contract.
As explained in the Product Descriptions of the different Perpetual Contracts, BFXD will use automated processes that apply programmed parameters to determine which published prices will be included in the calculation of the BFXCI. Such programmed parameters, however, are subject to change based on BFXD’s sole discretion. Factors that may affect the inclusion of published prices include, but are not limited to, whether data is unacceptably stale or published prices vary beyond standard deviations or otherwise reflect a materially unreliable expression of the prevailing market value. Accordingly, given that published prices can be excluded in the calculation of the BFXCI, there could be a variance between your calculation of the market price of the Referenced Token pair and the published value of the BFXCI.
As a composite index, the value of the BFXCI will likely be different from the prevailing price for the Reference Token Pair on the Bitfinex.com spot market and the prevailing price for the Perpetual Contract. Further, in the past, the published prices in each of the different exchanges or markets, whose published prices will contribute to the valuation of the BFXCI, generally have differed from one another and from the prices of Reference Token Pairs on the Bitfinex.com spot market. Based on this history of differing prices among different exchanges and markets for the same Reference Token Pairs, such pricing differences are expected to persist in the future. Accordingly, the Mark Price, the determination of when the Mark Price for a position is reached triggering forced liquidation of a BXFD market position, and the determination of Funding Payments will be based on a BFXCI price that will likely be different from the price for the Reference Token Pair on the Bitfinex.com spot market and that difference might be material.
BXFD has no control over or responsibility for the timeliness or accuracy of the prices for Reference Token Pairs published by the third party markets that BXFD uses to construct and establish its BFXCI. Accordingly, the data used for setting the BFXCI and, accordingly, Mark Prices and Funding Payments may be delayed, missing, stale, or inaccurate. In electing to trade in Perpetual Contracts and any other Derivative Product, you assume the risk that the BFXCI and Mark Prices may be set on the basis of delayed, missing, stale, or inaccurate data.
BFXD may display on the Derivatives Site one or more indices that relate to Derivative Products. Displayed information of this nature is for the convenience of Derivative Site users only and may not reflect actual index values due to latency, interim calculation error, or display or transmission problems. Derivatives Products incorporating indices will be settled utilizing the final calculated BXFD index values, even if these differ from the information displayed to Derivative Site users. In electing to trade in Perpetual Contracts and any other Derivative Product, you assume the risk that displayed information on the Derivatives Site may not reflect actual index values due to latency, interim calculation error, or display or transmission problems.
4. Liquidity Risk: Markets for Reference Token Pairs and markets for Derivative Products can at times become what is known as “illiquid,” which means there is a scarcity of persons who are willing to trade at any one time and a scarcity of bids and offers. Thinly traded or illiquid markets have potential increased risk of loss because they can experience high volatility of prices and in such markets market participants may find it impossible to liquidate market positions except at very unfavorable prices. There is no guarantee that the markets for any Reference Token Pair or Derivative Product will be active and liquid or permit you to establish or liquidate positions in the Reference Token Pairs and Derivative Products when desired or at favorable prices.
5. Risk of loss and reduction of gain and loss from the forced liquidation of open positions and from Funding Payments:
a. Failure to meet minimum Margin Collateral requirements. BFXD sets minimum margin requirements for open orders and positions in Derivative Products. It retains the power and discretion to revise the margin requirements at any time. If the Margin Collateral you commit to support a position in a Derivative Product falls below the required minimum, your position in that Derivative Product will be liquidated automatically and without notice to you. This will result both in a financial loss to you from the position and in your forfeiture of any of the Margin Collateral that remained after liquidation. Thus, in the event of a forced liquidation of your market position, you will lose and forfeit all of the Margin Collateral that was committed to the liquidated position. When a position is forcibly liquidated, any Funding Payments the Derivative Wallet was entitled to receive based on that position also will be forfeited and lost.
The specific price set by BFXD for forced liquidation of a position will be a particular market price of the Mark Price (the Referenced Token Pair price), not the price of the Perpetual Contract. Accordingly, in order to prevent a forced liquidation of a position you will need to pay attention to the Mark Price and the market price of the Referenced Token Pair and increase your Margin Collateral for the position before the market price for the Referenced Token Pair reaches your Forced Liquidation Price.
b. Risks of loss from Funding Payments. Funding Payments taken from the Available Derivative Wallet Balance and Margin Collateral in your Derivative Wallet to pay to the other side of the market constitute a loss of your currency holdings in your Derivative Wallet. Funding Payments occur automatically without prior notice based on market conditions. If Funding Payments reduce the amount of Margin Collateral below the required minimum margin, they will cause a forced liquidation or termination of open positions, as described in paragraphs 4(d) and 4(e) below, causing a trading loss and a loss of any excess Margin Collateral that supported the liquidated position(s).
During the time period when BFXD transfers Digital Tokens between Derivative Wallets to settle Funding Payment obligations for Perpetual Contracts, all trade and order matching and accounting for Margin Collateral in Derivative Wallets will be paused. This period of time may last several seconds or longer. Regular trading will resume once the Funding Payment settlement is complete. It is possible that the pause in trading of the Perpetual Contract will affect market pricing of the Perpetual Contract. For example, there is a potential that market conditions relevant to the valuation of the Perpetual Contract could materially change during the pause in trading, causing market participants to commence bidding at substantially different prices after the pause; and it is possible that market participants may reflect and take account of any projected Funding Payment in their bids and offers and trades. Please review the Funding Payment Summary applicable to the Perpetual Contract for more information.
c. Risk of loss and of tax liabilities from the conversion of Digital Tokens to Tether in order to make Funding Payments or to cover insufficient Margin Collateral in forced liquidations. Tether is the exclusive Settlement Token. Tether is used to settle Funding Payments. When there is insufficient Tether in your Available Derivative Wallet Balance to meet required Funding Payments, BFXD in its discretion will convert any Digital Tokens in your Available Derivative Wallet Balance into sufficient Tether to satisfy your Funding Payment obligation. Such conversion can cause any unrealized loss or gain in the market value of your Digital Tokens to be realized. This potentially can create tax liability for any realized gains. When such conversions occur, which Digital Token and how much of each will be converted to Tether to satisfy a Funding Payment or a forced liquidation will be committed to BFXD’s sole and exclusive discretion and it will exercise its discretion without regard to the user’s profit and loss and any tax liability that potentially could result.
d. Failure to comply with the Terms of Service. If you fail to comply with any of the obligations and requirements of the Other Site Terms of Service or Derivative Terms of Service, BFXD reserves the right and authority to immediately liquidate your open positions without prior notice, to confiscate your Fiat, funds, proceeds, Digital Tokens, or other property, and to prohibit you from access to trading. The forced liquidation of the open positions or confiscation of your property can result in a loss to you.
e. Forced liquidation of market positions as a result of market conditions. BFXD reserves the right to liquidate any open position of any trader when, in its sole discretion, it believes that is appropriate to address unusual, disruptive, or problematic market conditions. The forced liquidation of your open positions can result in a loss to you. When a position is forcibly liquidated, any Funding Payments the Derivative Wallet was entitled to receive based on that position also will be forfeited and lost.
f. Risk of loss or reduction in gain from BFXD’s “Position Termination Process”. BFXD reserves the right and authority to close open market positions in Derivative Products pursuant to its “Position Termination Process” described in the Derivative Terms of Service. The Position Termination Process involves the forced liquidation of open positions against other existing open market positions. Among other circumstances, the Position Termination Process could occur if and when an open market position in a Derivative Product fails to meet minimum Margin Collateral requirements but the position cannot be liquidated against resting open market orders without causing a deficit balance in the under-margined positions.
Through the Position Termination Process, an under-margined open position will be liquidated against other open market positions likely at a worse price than the then prevailing market price in order to avoid a deficit balance in either liquidated position. Liquidation of the under-margined position will result in a total loss of all Margin Collateral committed to the position. Liquidation of the other, offsetting open market position at a worse price than the then prevailing market price will result in a smaller financial gain (or a loss) than if the position had been liquidated at the then prevailing market price. When a position is terminated, any Funding Payments the Derivative Wallet was entitled to receive based on that position also will be forfeited and lost.
6. Derivative Products Complexity: You should understand the terms of any Derivative Product before entering into any transactions in the Derivative Product. The terms of Derivative Products are complex and can differ significantly from one another. The terms of Derivative Products differ from those of any Reference Token Pair underlying the Derivative Product.
7. Legal Risk: The legality of Derivative Products and the trading of them may not be clear and may vary under the laws of different jurisdictions throughout the world. This can mean that the legality of holding or trading Derivative Products is not always clear. Whether and on what basis a Derivative Product may constitute property, an asset, or a right of any kind might vary from one jurisdiction to another. You are responsible for knowing and understanding how the laws apply to you or your property, rights or assets, and address, limit, regulate, and tax the Derivative Products you trade.
8. Derivative Wallet Security Risks: The Digital Tokens transferred into your Derivative Wallet may be commingled with the Digital Tokens of other users of the Site and with the Digital Tokens of BFXD and its Affiliates. BFXD or its Affiliates is permitted to use your Digital Tokens for their own benefit, investment, and use while accounting for them in your Derivative Wallet. Transferring your Digital Tokens into your Derivative Wallet exposes your Digital Tokens to risks of loss from, among others things, security breaches from cyber attacks that hack and steal Digital Tokens, electronic or technological failures that impede or prevent market access and market performance, recordkeeping errors, and any insolvency, bankruptcy, or material financial losses of or incurred by BFXD or any of its Affiliates.
9. Risk of Derivative Wallet Freeze: BFXD may freeze your Derivative Wallet in the event that you are believed to be engaged in suspicious activity or to breach any of the Derivative Terms of Service. If your Derivative Wallet is frozen, you will not be able to trade or to make transfers to or from your Derivative Wallet. This may result in the closure of your open orders and forced liquidation or termination of your open positions pursuant to the Position Liquidation Process or the Position Termination Process.
10. Market and Position Default Risk: BXFD operates and administers the trading platform for the Derivative Products, but BXFD is not a counterparty to any Derivative Product and has no financial responsibility or liability for any failure of market participants to honor their financial obligations on their open Derivative Products positions. There is always a risk that one or more market participants will renege, default, or otherwise fail to honor their financial obligations or will be unwilling or unable to abide by the terms of their agreements. In the event that risk materializes, market participants can and likely will incur financial losses or reductions in gains from their own open positions in Derivative Products. In the event of a default, it is possible that any Funding Payments that you otherwise might have been entitled to receive will not be received. In addition, any Funding Payment the defaulting party would have been entitled to receive also will be forfeited and lost.
11. Risk of Liquidation Fund Insufficiency: BFXD maintains a Liquidation Fund of Digital Tokens designed to provide a financial fund that could be used to cover insufficient Margin Collateral to satisfy forced liquidations in its Position Liquidation Process and the Position Termination Process and to cover deficit balances arising in the Derivative Wallets of market participants. However, BFXD has the sole discretion regarding whether and how much of the Liquidation Fund assets should be applied in any instance. BFXD has no obligation to continue to maintain the Liquidation Fund in any amount (or at all) and may remove Digital Tokens from the Liquidation Fund for any purpose, including, for unrelated expenses of BFXD or for the financial gain of BFXD and its Associates. The Liquidation Fund is for the sole benefit of BFXD and its Associates and you waive any claim against the Liquidation Fund under the Derivative Terms of Service.