With the urge to cope with market needs, crypto exchanges are evolving to include more features and functionalities. It has become easier for investors (and traders) to take part in crypto trading. One of the most valuable services offered by these platforms is crypto derivatives.
Crypto Derivatives enable investors to minimize risks while optimizing returns. However, there is a thin line between:
Types of Crypto Exchanges
- Spot exchange: In this exchange, the cryptocurrency is transferred directly between market participants, allowing for fiat-to-crypto and crypto-to-crypto transactions and immediate asset settlement.
- Derivatives exchange: The cryptocurrency is not owned in this exchange; instead, a contract is acknowledged with an agreement to buy and sell the cryptocurrency at a predetermined price and time in the near future.
What are Crypto Derivatives Exchanges?
Crypto derivatives are primarily used to reduce the risks and volatility posed on crypto assets. They are secondary contracts or financial instruments whose value is derived from a primary underlying asset, in this case, would be a cryptocurrency such as Bitcoin.
It is a tool that allows investors to speculate on the future value of cryptocurrency. The main goal of the process is not to maximize profits, but to reduce future risks. Crypto futures, crypto options, and perpetual contracts are the most popular crypto derivatives.
How do derivatives improve your trading experience?
Derivatives are used primarily to protect a portfolio from adverse market movements and to mitigate the risk of this asset's volatile nature, given how much its price fluctuates. When investing for the long run, Bitcoin may go through periodic bear markets where your Bitcoin portfolio is unlikely to gain.
That’s where derivatives come into place. By hedging, you avoid having to compromise your crypto holdings or liquidate them at an unfavorable price by using put options in derivatives trading to offset the unpredictability of losses and thus avoiding hedging risks.
By betting or speculating on the future price of cryptocurrency allows investors to profit by betting on the future price of the cryptocurrency to take advantage of price fluctuations, also known as going short. The main idea here is to capitalize on market volatility.
Factors to consider when choosing a crypto derivatives exchange
- Trade volume: The volume of exchange is important to the trader because it affects transaction costs. As a result, this concept has an impact on users and influences their entry and exit points.The volume factor frequently complicates the position of altcoins on exchanges, making it difficult to sell or purchase large amounts of assets.
- Order book liquidity: An order book is a list of all open orders for a specific trading pair that are available on a given exchange. Order book depth and slippage are some parameters in the order book which can be used to derive liquidity. While depth is considered to be a positive function of liquidity, slippage is considered to be a negative function.
- Fees: For someone who trades derivatives regularly, fees play a significant role. The transaction cost varies depending on the derivatives exchange. Fees on cryptocurrency exchanges are levied in two ways:
a. Taker fees are charged when an order is placed, and trades are executed immediately; thus, they are expensive for the same reason.
b. Maker fees are charged when the order limit is placed, which adds liquidity to the order book.
4. Liquidity: A seller in a liquid market will quickly find a buyer without lowering the asset's price to make it more appealing. A buyer, on the other hand, will not be required to pay a higher price to secure the asset they desire. This can attract speculators and investors to the market, enhancing the market's favorable conditions even further.
5. Leverage Trading: Leverage aids in borrowing specific amounts of funds on which the exchange is held. The higher the leverage, the less money you need to invest in a position, making derivatives trading extremely efficient. In fact, C-Trade offers the highest leverage in the industry - 1:150 on BTCUSD.
6. Other factors: Other key factors to consider include fiat exchange support, user interface and experience, platform reputation, methods of exchange, technical analysis tools, order book, and algorithmic trading tools.
Choosing the best cryptocurrency derivatives exchange is a function of your personal expectations and priorities. Choosing the right derivatives exchange aids in portfolio diversification and risk reduction. Before deciding on a platform, remember to carefully research, study, analyze, learn, and comprehend the exchange. After all, your goals can vary based.
Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. C-Trade, its affiliates, agents, directors, officers, or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.