Derivatives Trading is a familiar term for traders or financial investors. Many traders have been successful with it in the cryptocurrency market. Let’s learn about Derivatives Trading with Crypto Trading. Why does it attract many traders, including new traders entering the cryptocurrency market?
What is derivatives trading?
For some newbies, the term Derivatives is quite strange. In fact, this is an extremely popular form of trading, especially in coin trading.
Derivatives – What are derivatives?
Derivatives are contracts between a buyer and a seller to trade an underlying asset at a specific price.
For example, bitcoin futures contracts work similarly to hedging positions, while minimizing price volatility by entering into a settlement agreement for the underlying Bitcoin bid.
What is Derivatives Trading?
Derivatives Trading is an English term, translated as derivatives trading. This is a form of exchanging derivative contracts between buyers and sellers. The purpose is to buy/sell a type of cryptocurrency pair. The contract will be executed at a specified time in the future.
For example, if you predict that bitcoin will increase in price, you will open a Buy position. If the actual price increases, you will make a profit. If you predict that the price will decrease, you will open a Sell position, and if the actual price decreases, you will make a profit. In short, Derivatives Trading is when you predict the price of a cryptocurrency pair to go in the right direction, whether it increases or decreases, you will still make a profit.
See more: “Decoding the secret” derivatives in crypto trading
How to type Derivatives contracts
Similar to other financial derivatives markets. Derivatives in Crypto also include basic types of contracts such as futures, options, and swaps.
Futures
A futures contract is the most common type of contract in Derivatives Trading. It gives the buyer the right to buy and the seller the right to sell. The two parties will buy and sell a specific asset at a fixed price at an agreed time in the future.
Options
An option contract is a type of contract that allows two parties to exchange a cryptocurrency commodity at a predetermined price. Or the contract is allowed to be exercised before a specific expiration date (optional). Option contracts are further divided into:
- Call Options: Traders are allowed to buy goods at a pre-agreed price on a specified date.
- Put Options: Trader is allowed to sell goods at a pre-agreed price on a specified date.
Perpetual contracts
In Derivatives Trading, the nature of a swap contract is similar to a futures contract. However, this contract does not specify a maturity date or settlement time. Traders will pay a funding price for the swap transaction in accordance with the swap price of the underlying asset.
Swaps are usually quite similar to the spot market. Therefore, they will trade close to the underlying reference price index. Depending on the specifications, the contract agreements may differ in terms of leverage, funding rates, etc.
The price volatility of swap contracts is also lower than that of futures contracts. Therefore, traders who like to open long positions often choose this type of contract.
Features of Derivatives trading
In fact, derivatives trading has brought huge income to many traders. However, the financial market in general and cryptocurrency in particular have both good and bad points.
Advantages of Derivatives Trading
- Higher Leverage: Derivatives trading requires traders to put only a small portion of the total value. Only 10%, sometimes lower. Therefore, traders can use leverage to increase profits with moderate capital.
- Low Commissions: Derivative commissions/execution fees are lower than other types of transactions.
- Protection against price fluctuations: Cryptocurrencies are highly volatile. Therefore, Derivatives Trading is ideal for reducing the impact of long-term price fluctuations. The mechanism is to directly enter into a settlement contract with the underlying price.
- Risk Hedging: Derivatives trading provides traders with a tool to protect their money. Traders can consider two-way risk to overcome the risk of a bearish market.
- High liquidity: Demand and trading volume in the derivatives market are extremely high. In May 2020, the volume exceeded $600 billion/day.
- Diversified investment portfolio: You can choose to buy and sell derivatives or liquid staking. So what is Liquid Staking? This is a solution that allows users to stake tokens crypto trading. Users will deposit money into the protocol to own tokens. You can store it or use it for lending, trading, or collateral.
Disadvantages of Derivatives trading
- High Risk: It allows traders to use leverage. Therefore, the risk of the contract being liquidated is also higher.
- Risks of OTC trading: Traders cannot check or assess the reliability of their counterparties. In addition, OTC transactions do not always comply with regulations.
- Legal protection is not 100%: Some jurisdictions have not yet legalized derivatives trading. Both the seller and the buyer must be in a jurisdiction where derivatives trading is legal. This limits counterparty risk.
See more: OKX: open an OKX account – Reputable crypto exchange
Who Should Make Money from Crypto with Derivatives?
Here are the ideal types of investors suited for making money from Crypto:
- Institutional: Institutional traders have the resources and tools to conduct technical analysis of the market and can open potential positions in derivatives trading. They can use leverage to increase profits and limit downside risks.
- Crypto Miners/Startups: Miners or coin miners are increasingly numerous and competitive. Therefore, they can diversify their income streams by engaging in Derivatives Trading with hedging. In addition, blockchain layer companies/projects can also use derivatives in risk management.
- Advanced Trader: Investors who have a broad understanding of the crypto market, and have technical and fundamental analysis knowledge. At the same time, understand the potential risks in derivative products.
Conclude
Derivatives Trading – is a form of growing money-making for many investors. Just understand the market and have a clear risk management strategy before starting to trade, and you will succeed. Let’s learn about knowledge in more in-depth articles on Crypto Trading!
FAQs
What is Derivatives Trading?
It is the exchange of financial contracts with commodities being a group of virtual currency assets. The contract will be agreed upon by the seller and the buyer at a specified price, executed at a specific time in the future.
What are the types of derivative contracts?
There are three types of contracts in derivatives, including futures contracts, options contracts, and perpetual swap contracts. The contracts are similar in form and type of cryptocurrency commodity. However, perpetual swap contracts do not specify the contract execution period.
Should You Participate in Derivatives Trading in Crypto?
The outstanding benefits such as high profits and flexible leverage make many traders curious about whether they should participate. However, this form has high potential risks, only suitable for those who love adventure.
