What are Crypto Derivatives?
Crypto derivatives are financial contracts that derive their value from the underlying assets price, which in this case, is a cryptocurrency. These derivatives allow traders to speculate on the underlying asset’s price movements without owning it. Crypto derivatives can be used for various purposes, such as hedging against price movements in the underlying asset, taking on more prominent positions than they would be able to with just their capital, taking short positions, and diversifying their portfolios.
However, they are also highly speculative and volatile, making them riskier than traditional markets. They are also largely unregulated, exposing traders to more significant risks and increasing the chances of fraud or manipulation. Some common kinds of crypto derivatives include:
Futures Contracts
These are agreements to buy or sell an intrinsic asset at a specific date and price in the future. Futures contracts are a type of crypto derivative that permits traders to assume the price trends of an underlying asset without having to own it. They are contracts to purchase or market a basic asset at a specific date and price in the future. In the case of crypto futures contracts, the underlying investment is a cryptocurrency like Bitcoin or Ethereum.
Futures contracts can be used for various purposes, including hedging against price movements, taking on more prominent positions, and diversifying a portfolio. They can also speculate on the underlying asset’s price movements, either by taking a long position (betting that the price will increase) or a short position (betting that the price will decrease).
Futures contracts can be traded on regulated futures exchanges and crypto-specific exchanges that offer futures trading. Some popular crypto exchanges that offer futures trading include BitMEX, Bybit, Deribit, OKEx, and FTX. Futures contracts can be highly leveraged, meaning traders can control prominent positions with relatively small amounts of capital.
However, this also increases the level of risk, as the potential for losses is also magnified. Additionally, trading futures contracts on crypto assets, which are highly volatile and speculative, is considered to be risky.
Options Contracts
These agreements provide the holder the right, but not the responsibility, to purchase or market an intrinsic asset at a specific date and price in the future. Options contracts are another type of crypto derivative that permits traders to assume the price trends of an underlying asset without having to own it. They give the holder the authority, but not the responsibility, to purchase or market an underlying asset at a special price (strike price) on or before a specific date (expiration date). In the case of crypto options contracts, the underlying asset is typically a cryptocurrency such as Bitcoin or Ethereum.
Options contracts can be used for various purposes, including hedging against price movements, taking on more prominent positions, and diversifying a portfolio. They can also be utilized to infer the underlying asset’s price movements, either by buying call options (betting that the price will increase) or put options (betting that the price will decrease).
Options contracts can be traded on regulated options exchanges and crypto-specific exchanges offering options trading. Some popular crypto exchanges that offer options trading include Deribit and FTX. Additionally, trading options contracts on crypto assets, which are highly volatile and speculative, is considered to be risky. It is noteworthy that Options trading has added complexity compared to trading futures contracts, and it is not advised for novice traders. Traders should understand the underlying asset, expiration, strike prices, and the mechanics of options trading before engaging in it.
Swaps
These are agreements to exchange one type of asset for another at a specific date in the future. Swaps are another type of crypto derivative that allows traders to exchange one set of cash flows for another. They are typically used to speculate on the price movements of an underlying asset or to hedge against price movements in the underlying asset.
In the case of crypto swaps, the underlying asset is typically a cryptocurrency such as Bitcoin or Ethereum. Crypto swaps can be used to exchange cash flows based on the spot price of the underlying asset for cash flows based on the futures price of the underlying asset or vice versa. This allows traders to speculate on the underlying asset’s price movements or hedge against price movements in the underlying asset.
Swaps can be traded over-the-counter (OTC) or on regulated exchanges. Some popular crypto exchanges that offer crypto swaps include BitMEX, Deribit, and FTX. Like other crypto derivatives, crypto swaps are considered to be highly speculative and volatile, making them riskier than traditional markets.
Additionally, the crypto derivatives market is largely unregulated, exposing traders to more significant risks and increasing the chances of fraud or manipulation. It is important to note that swaps are considered to be more complex than futures and options contracts and are not recommended for novice traders. Traders should understand the underlying asset, the cash flows, and the mechanics of swaps trading before engaging in it.
Perpetual Contracts
Perpetual contracts, also known as perpetual swaps or inverse futures, are a type of crypto derivative that closely resemble traditional futures contracts. The main difference between perpetual and traditional futures contracts is that perpetual contracts do not have an expiration date, hence the name “perpetual.” This means that traders can hold a position in a perpetual contract indefinitely as long as they have enough margin to maintain it.
Perpetual contracts are based on the underlying asset, typically a cryptocurrency such as Bitcoin or Ethereum. The price of the perpetual contract is derived from the spot price of the underlying asset and is usually traded at a premium or discount to the spot price. This creates the opportunity for traders to speculate on the underlying asset’s price movements or hedge against price movements in the underlying asset.
Perpetual contracts are typically traded on crypto exchanges, such as BitMEX, Bybit, and OKEx. These crypto derivatives have gained popularity due to their high leverage and trading volume. Like other crypto derivatives, perpetual contracts are considered to be highly speculative and volatile, making them riskier than traditional markets.
Additionally, the crypto derivatives market is largely unregulated, exposing traders to more significant risks and increasing the chances of fraud or manipulation. It is important to note that perpetual contracts are considered more complex than futures and options contracts and are not recommended for novice traders. Traders should understand the underlying asset, the cash flows, and the mechanics of perpetual contract trading before engaging in it.
CFD (Contract for Difference)
This contract enables traders to speculate on the price movements of an underlying asset without having to own the asset. A Contract for Difference (CFD) is a crypto derivative that authorizes traders to assume the price trends of an underlying investment, such as a cryptocurrency, without actually owning the asset. With a CFD, traders can go long (betting on the price to rise) or short (betting on the price to fall) on the asset.
The profit or loss on a CFD trade is determined by the difference between the price at which the trade was entered and the price at which it was closed. CFDs are popular among traders because they allow for high leverage, meaning that traders can open prominent positions with a small amount of capital. However, CFDs also come with significant risks, as traders can lose greater than their initial investment. They are also not available in the US, as it is illegal to trade CFDs in the US.
Crypto Derivative Exchanges
Crypto derivatives are typically traded on technological platforms called crypto derivatives exchanges. These platforms are typically unregulated, and the nature of crypto markets can make them highly volatile and risky. Crypto derivative exchanges are specialized platforms that allow traders to buy and sell crypto derivatives such as futures, options, and swaps. These exchanges typically offer a variety of trading pairs, including those that involve popular cryptocurrencies such as Bitcoin and Ethereum, as well as those that involve fiat currencies or other cryptocurrencies.
Some of the significant crypto derivative exchanges include:
BitMEX
This is one of the most extensive and prevalent crypto derivatives exchanges, offering high-leverage trading for futures and swaps. BitMEX (Bitcoin Mercantile Exchange) is one of the largest and most popular crypto derivatives exchanges. It was founded in 2014 and is headquartered in Seychelles. BitMEX offers a variety of crypto derivatives products, including futures and swaps. One of the unique features of BitMEX is its high-leverage trading, which allows traders to take on prominent positions with a small amount of capital.
The exchange presents influence up to 100x on specific trading pairs, which can amplify profits and losses. BitMEX also offers a wide range of trading pairs, including those involving Bitcoin, Ethereum, and other major cryptocurrencies.
The exchange uses a maker-taker fee model, which rewards traders who provide liquidity to the market with lower trading fees. BitMEX is known for its advanced trading interface and sophisticated order types, which can be challenging for new traders to navigate. Additionally, the exchange has faced controversy and criticism due to its high leverage and lack of regulation. It is essential to research and understand the risks involved before trading on BitMEX or any other crypto derivatives exchange.
By bit
This is another extensive crypto derivatives exchange that offers futures and perpetual contracts trading. By bit is a crypto derivatives exchange founded in 2018 and headquartered in Singapore. The exchange offers trading in crypto derivatives, such as futures and perpetual contracts, focusing on providing a stable, user-friendly, and high-performance trading experience.
By bit offers a wide range of trading pairs, including those involving Bitcoin, Ethereum, and other major cryptocurrencies. The exchange also offers high-leverage trading, with up to 100x leverage available on specific trading pairs, allowing traders to take on prominent positions with a small amount of capital; however, this also amplifies the risk of loss.
One of the unique features of Bybit is its use of a “Fair Price Marking” system, which is designed to prevent manipulation and ensure a fair trading environment. The exchange also offers a “Cross Collateral” feature, which allows traders to use their Bitcoin as collateral to trade other cryptocurrencies. By bit has a user-friendly interface and a mobile app for trading. It also provides 24/7 customer support, which can be helpful for new traders. However, like with any crypto derivatives exchange, it is crucial to understand the risks and research before trading.
Deribit
This is a crypto derivatives exchange that focuses on options trading; it also offers futures trading. Deribit is a crypto derivatives exchange founded in 2016 and headquartered in the Netherlands. The exchange offers to trade in crypto derivatives, primarily options, and also offers futures trading. Deribit is known for its focus on options trading, a more advanced and complex form of trading than traditional spot or futures markets.
Deribit offers trading in various options, including calls and puts, with strike prices and expiration dates and additional options trading on various cryptocurrencies, including Bitcoin, Ethereum, and other major cryptocurrencies. The exchange also offers high-leverage trading, with up to 100x leverage available on specific trading pairs, allowing traders to take on prominent positions with a small amount of capital.
However, this also amplifies the risk of loss. Deribit also has a user-friendly interface and offers 24/7 customer support. Additionally, the exchange uses a maker-taker fee model, which rewards traders who provide liquidity to the market with lower trading fees. However, as options trading is more complex than spot or futures trading, it is vital for new traders to thoroughly research and understand the risks and mechanics of options trading before getting involved. Additionally, staying updated with the latest developments and regulations is essential as the market is rapidly changing and evolving.
OKEx
This significant crypto exchange offers a wide range of crypto derivatives products. OKEx is a crypto derivatives exchange founded in 2014 and headquartered in Malta. The exchange offers to trade crypto derivatives such as futures and options, focusing on providing a wide range of trading pairs and high liquidity. OKEx offers a wide range of trading pairs, including those involving Bitcoin, Ethereum, and other major cryptocurrencies. The exchange also offers high-leverage trading, with up to 100x leverage available on specific trading pairs, allowing traders to take on prominent positions with a small amount of capital; however, this also amplifies the risk of loss.
One of the unique features of OKEx is its use of a “Fair Price Marking” system, which is designed to prevent manipulation and ensure a fair trading environment. The exchange also offers a “Cross Collateral” feature, which allows traders to use their Bitcoin as collateral to trade other cryptocurrencies. OKEx has a user-friendly interface and mobile apps for trading on the go. It also provides 24/7 customer support, which can be helpful for new traders. However, like with any crypto derivatives exchange, it is crucial to understand the risks and research before trading.
FTX
This crypto derivative exchange offers futures and options trading; it also has a wide range of trading pairs, including leveraged tokens and prediction markets. FTX is a crypto derivatives exchange founded in 2019 and headquartered in the Cayman Islands. The exchange offers to trade crypto derivatives such as futures and options, focusing on providing a wide range of trading pairs and high liquidity.
FTX offers a wide range of trading pairs, including those involving Bitcoin, Ethereum, and other major cryptocurrencies. The exchange also offers high-leverage trading, with up to 101x leverage available on specific trading pairs, allowing traders to take on prominent positions with a small amount of capital.
However, this also amplifies the risk of loss. FTX has a reputation for providing a professional trading platform; it is known for its advanced features, such as Algo trading, short selling, and an OTC (Over Counter) trading desk. The exchange also has a strong liquidity and order book depth, making it a popular choice among professional traders. FTX has a user-friendly interface and mobile apps for trading on the go. It also provides 24/7 customer support, which can be helpful for new traders.
These exchanges typically use a peer-to-peer trading model in which buyers and sellers trade directly. This allows for a high level of liquidity and the ability to trade with high leverage but also increases the risk of counterparty default. It is important to note that the market of crypto derivative exchanges is rapidly changing and evolving, and it is a good idea to stay updated with the latest developments and regulations.
Additionally, it is vital for investors to thoroughly research and understand the risks involved before investing in crypto derivatives, as the market can be highly volatile and risky. Some countries may have specific regulations or restrictions on crypto derivatives trading, and it is vital to be aware of these before getting involved.
The Importance Of Crypto Derivatives
The importance of crypto derivatives lies in their ability to provide traders and investors with more flexibility and opportunities in the cryptocurrency market. They allow traders to take on more prominent positions than they could with just their capital, take short positions, and diversify their portfolios by providing exposure to different cryptocurrencies and markets. They also provide opportunities to make profits from the volatility of the crypto market. The future of crypto derivatives looks promising as more institutional investors and traditional financial companies are beginning to enter the market.
This increased interest and participation are expected to bring more liquidity, stability, and regulatory oversight to the market. Additionally, developing new crypto derivatives products such as options, futures, and swaps is expected to expand the market further and provide traders with even more opportunities. However, it is worth noting that crypto derivatives markets are highly speculative and volatile, making them riskier than traditional markets. They are also largely unregulated, exposing traders to more significant risks and increasing the chances of fraud or manipulation.
