Introduction To Cryptocurrency Derivatives Trading

If you’d thought that cryptocurrency has penetrated mainstream culture in recent times, you’d probably want to pay attention to its derivative known as, well, cryptocurrency derivatives. It is fast booming and the data has shown that trading activity on Wall Street is even being dwarfed by it.

Cryptocurrency derivatives, explained

First and foremost, let’s break down ‘derivatives’ in its traditional form. With ‘options’ and ‘futures’ being common investment classes associated with it, derivatives are contracts that represent a deal to sell or buy an underlying asset at a speculated price between two investors.

Cryptocurrency derivatives aren’t all that different – it’s just that the underlying asset you’re trading over are cryptocurrencies, instead of, say, stocks and shares. Arguably, the most popular cryptocurrency derivative is Bitcoin Futures, which still sees one of the largest trade volumes today.

The two most recognised types of cryptocurrency derivatives would be futures and options, although other forms of them, such as perpetual futures, swaps and forwards, are not uncommon in this space.

Cryptocurrency futures

As its name suggests, futures are an agreement between two investors to buy or sell a set quantity of a (virtual) underlying asset (i.e. Bitcoin) at a future date, at the pre-determined price.

You may take either a long (speculation that the price will go up) or short (speculation that the price will go down) position, and you’ll be matched with an investor who takes the opposite position.

All futures contracts have an expiry date that denotes when the two investors will settle their outstanding positions. Futures contracts without expiry dates are known as perpetual futures.

Cryptocurrency options

There are similarities between options and futures whereby the buyer and seller enter into an agreement to buy or sell the underlying asset at that price (strike price) when it expires – except that the two investors take a ‘call’ or ‘put’ option instead of a ‘long’ or ‘short’ position.

Call option: You get the right to exercise the option and purchase the asset at strike price. You’d do this if you speculate that the price will go up.

Put option: You get the right to sell the asset at strike price. You’d do this if you speculate that the price will go down.

Note that on the expiry date of the contract, the buyer (call option) only has the right to purchase the cryptocurrency at strike price, not necessarily the obligation to actually do it (if the price doesn’t swing in favour in the end). The buyer could simply let the option expire.

Pros & Cons of cryptocurrency derivatives trading

Top cryptocurrency derivatives platforms for your trading needs

• Bybit
• Binance
• BitMEX
• Phemex
• Bitfinex
• Kraken
• Deribit
• OKex

Cryptocurrency derivatives: Who is it for

Not for the faint of heart, for one. In all seriousness, as much as cryptocurrency derivatives trading offers endless possibilities in terms of maximising profits, the opposite holds true – risks and losses are amplified. The reality of this not-so-positive edge of the double-edged sword shouldn’t be dismissed, considering that cryptocurrency prices fluctuate wildly by the minutes and seconds (can you predict which famous technopreneur is going to tweet a small-time remark with big-time repercussions?).

Therefore, as mentioned in the pros and cons table above, cryptocurrency derivatives trading is probably best left as your future trading option when you’re more well-versed in the ins-and-outs of cryptocurrency.