Although cryptocurrencies have been around for a long time, the crypto boom did not begin until 2020. The popularity of DeFi (Decentralized Finance) and blockchain-based cryptocurrency trading has further transformed the crypto market in recent months. Numerous crypto trading platforms have now launched various advanced options to boost cryptocurrency trading, including crypto loans, asset tokenization, and so on. Crypto derivatives are one such amazing service offered on several crypto trading platforms, of which Bitcoin futures are the most popular.
There has been an increased interest in crypto derivatives trading ever since the Chicago Board Options Exchange (CBOE) and Chicago Mercantile Exchange (CME) launched it on their platforms in 2017.
Typically, what attracts traders to crypto derivatives is the high-risk, high-reward nature of trading on cryptocurrency derivatives markets. Most importantly, traders in a derivatives market can use "leverage," which means they can wager a much larger bet than they can cover with the funds in their hands and commit to a much larger position. While this can yield huge wins, it also has the potential to yield immediate losses, but the high rewards have led many to overlook this risk factor. Furthermore, unlike traditional currency markets, cryptocurrency derivatives platforms only require a valid email address, some funds, and a few minutes of your time to trade.
So what exactly are crypto derivatives? What are the different types of crypto derivatives? Why are they on the rise? And how can you start trading crypto derivatives on the best platform? Read more to find out.
What are crypto derivatives?
Crypto derivatives are essentially secondary contracts or financial instruments with a primary asset as their source of value. Bitcoin or other cryptocurrencies will typically serve as the underlying assets. Derivatives are an important aspect of any financial market, given how they perform several key functions.
For starters, they allow traders to bet on asset prices in the future without having to buy the underlying asset now. This indicates that the trader will have to invest less money to obtain market exposure.
Secondly, traders can use derivatives as risk management tools. Crypto derivatives such as crypto futures, forwards, swaps, and options can all be utilized to lock in prices and protect traders from severe losses due to unexpected market movements. Also known as hedging, several traders often employ this strategy to protect themselves from unexpected market movements.
This article explores the three most popular types of crypto derivatives: crypto futures, crypto options, and perpetual contracts.
Crypto futures are derivative products that involve two parties agreeing to acquire or sell an asset at a predetermined price on a predetermined date. Simply put, crypto futures are a type of bet that allows traders to speculate on an asset's future price. Traders can either go long, betting on a price increase, or go short if they’re betting on a price decrease. When the contract's expiration date arrives, both parties will agree, and the deal will close. Futures contracts differ from other derivatives in that they have a specific settlement date.
Ever since the introduction of digital assets, crypto futures have clearly become one of the most attractive trading instruments. They've even promoted an extra-industry interest in the crypto field by permitting speculative exposure, broadening its general appeal, and propagating mainstream adoption. From regular traders to institutional investors, everyone seems to be smitten with crypto futures.
Bitcoin futures are undoubtedly the most popular type of crypto futures. A Bitcoin future is essentially a contract or agreement between two parties to buy and sell BTC at a specified price on a specified date in the future. Neither party, however, is obliged to hold Bitcoin. Instead, the deal is settled in US dollars or any other currency that has been agreed upon.
Bitcoin futures contracts can be better explained through a real-world example. Let’s assume that 1 BTC is worth $1,000.
- A trader named Alex feels the asset's value will rise and intends to buy five futures contracts. This raises the value of 5 BTC holdings to $5,000.
- Let's say that Alex was right and that the price of BTC soared to $2,000.
- Alex can now sell the five contracts for a total of $10,000, thereby making a profit of $5,000.
If Alex decides to go short, the same approach applies.
- Instead of buying, Alex sells five BTC futures contracts for $1,000 each, for a total position value of $5,000.
- Let's say that the price of 1 BTC dropped by $500.
- Alex will then repurchase the initial five contracts for a total value of $2,500, thereby keeping $2,500 as profit.
Certainly, crypto futures offer a fantastic solution to advanced traders who are looking to implement hedging strategies. Moreover, traders can also obtain market exposure to crypto assets through futures in a very capital-efficient manner.
Crypto options are a type of derivative contract that allows traders to buy or sell a cryptocurrency at a defined price and date. In the same manner as other derivatives, options allow traders to forecast changes in price and profit from them. They can be settled in fiat currency (US dollars) or within cryptocurrencies (bitcoin, ether, etc.). However, they give traders only the right to buy or sell an asset, not the obligation.
Call and put options are the two types of crypto options. A call option denotes the right to buy, whereas a put option denotes the right to sell.
Bitcoin options are derivative contracts that track the price of BTC but aren't required to be settled by the expiration date. You won't be going long or short with options; instead, you'll get "call" and "put" options. When a call option expires, the owner will have the opportunity to buy bitcoins at a certain price. A put option, on the other hand, allows the owner to sell. In both cases, the owner can decide whether or not to exercise their right.
Let us continue with Alex’s example.
- Assume Alex invests $10,000 in a BTC call option that would expire in a week.
- He has the option to buy one BTC for $10,000 one week later, regardless of the price.
- However, if the price of BTC has climbed to $11,000, Alex can easily exercise his right by purchasing a BTC at a lower price and selling it for a $1,000 profit.
- Alex would simply let the option expire if the price had dropped below $10,000, as buying a BTC at the strike price would plainly result in a loss.
Traders typically trade crypto options because they offer a low-risk and low-cost alternative to perpetual swaps and crypto futures.
Perpetual contracts, otherwise known as perpetual swaps, are derivatives that do not have an expiration or settlement date. These days, perpetual contracts are very popular among traders since they allow them to maintain leveraged positions without having to worry about the expiration date. Due to perpetual funding rates, the primary mechanism that provides price stability for perpetual contracts, they trade close to the index price of the underlying asset, unlike futures.
Let’s understand perpetual contracts better by following Alex’s example.
- Assume that BTC/USD perpetual contracts are valued at $1 of a BTC on an exchange.
- If the price is at $10,000, Alex can open a position of 10,000 contracts to trade the equivalent of 1 BTC.
- If Alex decides to go long, he can keep his position open for as long as he likes until the price reaches a level that satisfies him.
- Finally, when Alex decides to close his trade, the exchange will typically compensate him for the difference in price between his entry price and the current market price.
While the above-mentioned example is one of the most basic ways to trade perpetual contracts, traders can further advance their trade game by incorporating leverage, an essential characteristic of crypto derivatives trading.
Understanding leverage in crypto derivatives trading
When trading crypto derivatives, traders usually have the opportunity to borrow additional funds from an exchange or a broker in order to trade underlying assets with the desired exposure. This means that they can gain leverage on their initial capital. Leverage, also known as margin trading, essentially allows traders to create a trading position with additional funds by allowing them to invest more in Bitcoin (or another asset) than their existing holdings would normally allow. Hence, the more leverage a trader has access to, the more they can invest in their holdings and the more profits they can make.
However, in some situations, traders may owe a brokerage or exchange even more than the total value of their holdings. In an effort to prevent such substantial losses, most crypto trading platforms employ a set of "sell triggers" to ensure that traders can return their debts. When the price of an asset falls too low, these platforms will immediately liquidate their users' holdings.
How C-Trade is making crypto derivatives trading more accessible for the masses
Certainly, the prospects of making huge returns with less risk via crypto derivatives trading have enthralled many, but they often find it difficult to find a good platform. This is where C-Trade enters the equation.
Whether you’re a beginner to the crypto market or a seasoned trader, C-Trade offers various trading perks that make crypto derivatives trading easier for everyone. Some of the key features of C-Trade are as follows:
- 150 x leverage
C-Trade offers 150x leverage for all trading instruments, including perpetual contracts. This allows traders to take on larger positions and get a higher return on their investment.
- High-level security
C-Trade stores all their customers' funds are safeguarded in their multi-signature cold wallets. They also deploy manual authorization for withdrawals, and the C-Trade security team works 24/7 to ensure an extra layer of security.
- $200 sign-up bonus
Moreover, as a symbol of appreciation for joining the platform, C-Trade also offers its users a whopping $200 bonus when they sign up with C-Trade.
- Instant Withdrawals
With quick and immediate withdrawals offered on the platform, transactions will only take a few seconds.