Introduction
Cryptocurrency trading has blossomed from a small market to a billion-dollar international industry. Amidst all this, the cryptocurrency derivatives market has gained enough traction. The article highlights all the details you need to know about cryptocurrency derivatives trading.
What are cryptocurrency derivatives?
Mathematics and financial markets walk on similar paths when derivatives come into the picture. The concept of derivatives was introduced in Mathematics. It referred to a value or a variable which has been derived from another variable. Similarly in financial markets, the derivative is an instrument that is derived out of some market products. Its price is dependent on the value of the underlying asset from which it is derived. The underlying asset can range from stocks, currencies, commodities, indices, etc.
When the underlying asset is a cryptocurrency, the derivative is referred to as cryptocurrency derivatives. It is a financial contract between two or more parties based on the future price of the cryptocurrency.
What are forms of derivatives?
Cryptocurrency derivatives trading platforms provide various forms of derivatives for trading. The derivatives can be categorized into the following main types
- FORWARDS – Forward contracts are the agreement between the two parties to buy and sell the crypto asset at a pre-determined time and pre-determined price. Both parties are obliged to respect the agreement.
Ex – Bitcoin Forwards
- FUTURES – Futures contracts are the agreement between two parties to buy and sell the crypto asset at a pre-determined date and pre-determined price. They are just like forwards with the only difference that futures are traded on exchanges and hence are standardized unlike forwards. Forwards give you the option to customize your contract. Since futures are traded over the exchange, it eliminates the counterparty risks which are present while trading forwards.
Ex – Bitcoin Futures
- OPTIONS – Unlike forwards and futures where the buyer is obliged to purchase an asset and seller is obliged to sell an asset, options provide the right to the buyer to choose whether to perform an agreement on a specified date or not. Meanwhile, the seller of the option has the obligation to execute the transaction if the buyer exercises his option. Hence the name “Options”
Ex- Bitcoin/Etherium Options
- SWAPS – A swap is a form of derivative in which one party exchanges or swaps the values or cash flows of one asset (financial instrument) for another. In this cash flow, one value is fixed and the other is variable. The variable value is based on the index price, interest rate or currency exchange rate. Most popularly used swaps are interest rate swaps.
Ex. Bitcoin Perpetual Swap
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