The various derivatives of the crypto ecosystem
The cryptocurrency ecosystem is teeming with a variety of financial products and services. Some of the most popular of these offerings are crypto derivatives. Like the ecosystem it encompasses, crypto derivative trading offers an almost inexhaustible range of possibilities. This blog post will explore the various leading types of crypto derivatives, from perpetual contracts to options trading, and the differences between them.
In the financial world, a derivative is an investment that derives value from an underlying asset (i.e. bitcoin). By enabling traders to bet on the value of an underlying asset with the ability to leverage, crypto derivatives – such as bitcoin futures contracts – provide a valuable avenue for speculation.
In recent years, Bitfinex * has embraced this growing interest by developing its platform with a wide variety of derivative products, which are discussed in detail below.
Futures market explained
The most common derivative – is the crypto futures contract. During a bitcoin futures trade, two parties commit to buy or sell BTC on a specified date for a predetermined amount.
However, crypto futures contracts are more than just a bet on an underlying asset; they also provide a valuable hedging option. For example, traders with an existing spot position in BTC can mitigate price swings by taking an opposite position within a bitcoin futures contract.
Unlike spot trading, crypto derivative markets use leverage. Leverage allows traders to borrow capital to fund a contract. Leverage allows traders to borrow capital to fund a contract. Leverage is typically used to fund a larger position without the need for a significant equity stake up front.
Perpetual Contracts (and How They Differ From Crypto Futures)
Perpetual contracts work exactly like a traditional crypto futures agreement, with one crucial differentiation: they don’t expire.
Perpetual contracts are the best of both worlds, as they enable the intuitiveness of spot market trading while preserving the benefits of the futures market such as leverage and hedging.
Allowing an indefinite expiration date allows traders to hold a position for as long as they can fund it. This allows for an easier approach to futures trading, with funding every 8 hours to ensure the position remains open.
What is options trading?
Options give traders the right to buy or sell an underlying asset without the obligation to buy or sell it. As with futures, traders who undertake a call option or put option agree on a specific price and period for the contract.
Unlike traditional future agreements – where parties on both sides of the trade are required to buy / sell at maturity – options do not require participants to buy / sell, they simply make the option available.
But how does options trading work?
Using a real example, let’s assume a trader wants to buy 10 bitcoin at $ 10,000 per BTC. However, given the market’s propensity for wild swings, the trader is concerned about a price drop. With call options, they can do it opportunity Buy 10 BTC at a cost of $ 100,000 for a specified period. Once the expiration date is around, regardless of whether the price shoots up or down within that time, the trader has choice buy or run away.
Let’s imagine bitcoin has managed a 2x move to $ 20,000 at the end of its expiration period. The merchant is allowed to buy bitcoin at the predetermined option price and sell it for the market price, making a total profit of $ 100,000.
Bitfinex’s Crypto Derivatives
Bitfinex Derivatives currently offers perpetual futures markets with up to 100x leverage. A recent interview with Bitfinex CTO Paolo Ardoino revealed that Bitfinex Derivatives is looking forward to take over options trading within Q1 of 2020.
Derivatives offer a wide range of advantages, offering a low barrier to entry and the ability to hedge bets on existing positions. While the underlying market offers a somewhat one-dimensional opportunity for speculation, derivatives offer a unique range of trading opportunities.
* The derivatives platform is provided by iFinex Financial Technologies Limited. References to Bitfinex derivatives in this post are references to iFinex Financial Technologies Limited.