Before we get into the meaning of Crypto Derivatives trading, let’s take a step back and define derivatives trading.
Derivatives are contracts in the world of financial markets and investments that represent a deal between two parties to sell or buy an asset, commodity, or financial instrument at a predetermined price on a predetermined date in the future. In the case of Crypto Derivatives trading, the two parties agree on a contract that speculates on the future prices of cryptocurrencies.On the date of contract execution, the two parties must agree on the selling and buying prices of the cryptocurrency, regardless of the market price (whether it has fallen or risen) on that specific date.
Crypto Derivatives trading can either be done on CeFi or DeFi exchanges or customer-to-customer (C2C). Derivatives trading is commonly used to hedge against the risk of volatile assets, particularly those with large price swings. The goal of trading derivatives is not to make money, but to reduce risks associated with a volatile asset. For example, if a trader predicts that Bitcoin’s price will rise in the future, he/she can invest in buying some Bitcoins, or if he/she owns some Bitcoins and predicts that its price will fall in the future, he/she can sell them off to avoid losses.
The derivatives trading market is quite volatile, which is why Warren Buffet referred to them as “financial weapons of mass destruction.” However, there are some very interesting real-world applications for derivative trading.For example, many airlines in the United States hedge against volatile oil prices, allowing them to pay less than their competitors.
Types of crypto derivatives trading
Types of Derivatives
Derivatives have four main forms, namely: options, forward, swaps, and futures.
-
Options
These contracts enable the buyer or seller to transact with a specific asset at a predetermined price while adhering to a timetable.Traders are not required to buy assets in accordance with contracts, which is a significant distinction between options and futures contracts. -
Forward
Forward is a contract that can be customized to suit the needs of the trader. This is usually done on an over-the-counter (OTC) exchange. Risk factors must also be considered. -
Swap
A swap occurs when two parties join forces solely for the purpose of profiting from the exchange of cash flows at a future date. The assets are usually exchanged as bonds, notes, or loans. -
Futures
The trader must buy or sell an asset at a fixed date and price under this contract.
Concept of Perpetual Futures where there is no expiry date for the contract.
How Crypto Derivatives Trading Benefits?
Crypto Derivatives trading is popular among traders, which is why many exchange platforms have begun to provide such services.
There are several benefits to trading Crypto Derivatives; a few are mentioned below.
Hedging
Traders and investors use derivatives trading to reduce the risk of suffering from potential losses. In the stock market, an investor uses the Put option in derivatives trading to offset losses caused by unforeseeable future events. Thus, Derivatives trading is the best when it comes to hedging risks.
Risk Mitigation against volatile Cryptocurrencies
The main reason traders invest in derivatives trading is to reduce the risks associated with the volatile nature of the asset, in this case cryptocurrencies. Bitcoin is, as we all know, a highly volatile cryptocurrency with extreme price fluctuations. As a result, traders use Bitcoin derivatives trading to mitigate the risk associated with its constantly fluctuating market price.
Crypto Price Speculation
Betting and speculating on the value of cryptocurrencies is another advantage of derivatives trading. Traders use derivatives to bet on the future price of cryptocurrency in order to profit from price fluctuations.
Trading in Crypto Derivatives is a promising concept
As previously said, Crypto Derivatives Trading is an excellent risk management strategy.Because of the high demand for derivatives trading, not only investors but also exchange platforms have recognized the need for it.
We are here for the innovative and unique blockchain solution with our cryptocurrency development company and equipped with highly experienced developers to transform your business digitally with our blockchain application service.
