Derivatives trading plays an important role in the financial market today. Especially in the field of Crypto cryptocurrencies. This is a powerful tool for investors and traders. It helps them manage risks, implement speculative strategies, and optimize profits. Let’s explore this tool in detail with Crypto Trading through the following article!
Learn about Derivatives market
Many people are attracted to the Crypto market. However, that attraction does not only come from coins. It also comes from products called Derivatives. After 5 years of launching in the UK, trading has become an attractive investment option and a risk management tool for basic traders.
What is the concept of Derivatives?
Derivatives are financial contracts based on predictions value of an underlying asset. The difference between the current price and the future price of the asset provides liquidity opportunities. The ability to hedge risk and create price differences in the market. This means you can profit without directly owning. Or trading those cryptocurrencies.
Basic Contract Types in Derivatives Trading
The following are the common types of contracts in Derivatives trading :
Type Forward Contracts – Forward Contracts
A Futures Contract in Derivatives is an agreement between two parties to buy and sell an asset. Transaction at a specific time in the future at a pre-determined price.
For example: You and your customer have agreed to buy a car today for 25 million VND. You will deliver the car within the next month. Regardless of whether the car price increases or decreases in the market during this time. You still have to sell it for 25 million VND.
Type Future Contracts – Futures Contracts
A futures contract is a standardized contract between a seller and a buyer. To trade a specific asset at a specified time in the future. Traded at a pre-agreed price.
For example This month, you sign a futures contract with Party B to buy goods for 10 million VND after 6 months. This means that after 6 months, Party B must sell those goods to you for 10 million VND. Regardless of whether the market price increases or decreases.
Type of Option Contracts – Option Contracts
An option contract gives the holder the right, but not the obligation, to buy or sell an asset at a specific time in the future at a predetermined price.
For example: You buy an option contract for 2 thousand VND. After 6 months, the price of gasoline increases to 30 thousand VND/liter. You will have the right to buy gasoline at 20 thousand VND/liter. Conversely, if the price of gasoline decreases to 15 thousand VND/liter. You can forgo the right to buy and lose the cost of 2 thousand VND for this option contract.
See more: How to “get rich” thanks to crypto trading for trader
Swap Contracts Type – Swap Contracts
A swap contract is an agreement between two parties to exchange cash flows arising from financial instruments in the future.
For example, Company A in the UK enters into a swap contract with a counterparty to buy 100 barrels of oil at $100/barrel in the next 6 months. The purpose is to lock in the purchase price of the oil and reduce the risk of price fluctuations. If the price of oil rises above $100/barrel, Company A receives the difference. If the price falls below $100/barrel, Company A loses the difference.
These are popular financial contracts of it used in financial markets to manage risk and optimize returns.
So what are Derivatives in Crypto trading?
Derivatives in Crypto trading are financial contracts based on the price of cryptocurrencies. Examples include Bitcoin, Ethereum, and other cryptocurrencies. These contracts allow investors to speculate on the price of these cryptocurrencies. Traders do not need to own the actual coins.
How are derivatives in Crypto trading different from traditional derivatives?
The difference between Derivatives in Crypto trading and Traditional Derivatives lies in the underlying assets. In Traditional Derivatives, contracts are based on assets such as stocks, bonds, or commodities. Meanwhile, Derivatives in Crypto trading use cryptocurrencies as the underlying assets.
Factors to consider before trading Derivatives
When trading Crypto Derivatives or Spot trading, your main goal is still to make a profit. Below are the important indicators that you need to pay attention to when trading Crypto Derivatives.
What role does leverage play in Derivatives trading?
Derivative trading always involves the use of leverage. This is a tool that increases the profits for traders. But at the same time, it also brings a higher level of risk.
The higher the leverage, the greater the profit potential. But at the same time, it also increases the level of risk. Conversely, with lower leverage, although the profit is reduced, it also minimizes the risk for the trader.
The Impact of Fees on Crypto Trading Derivatives
This is the fee that the exchange collects from each user transaction. It is called the Margin fee.
As mentioned, Derivatives trading uses leverage. It allows traders to borrow a portion of their trading capital. The exchange will be the one to provide this loan and collect interest from the loan.
This fee usually varies depending on each exchange. It is usually calculated based on the trading volume of each order. Traders can refer to the trading fee table as presented.
For example, with the Snapex exchange:
Margin Fee = 0.15% of the total loan amount.
Suppose:
- Margin = 100 USD
- Leverage = 10
Trading Fee = Margin * (Leverage – 1) * 0.15% = 100 * (10 – 1) * 0.15% = 1.35 USD
Overnight Cost and Example of How It Affects Derivatives
In the previous part, the article mentioned the fee for each transaction. That is the interest fee that the exchange charges when lending to users to use leverage. The longer the loan, the fee will naturally increase.
Overnight fee is an additional overnight trading fee that the exchange charges. It is calculated as an interest rate when traders hold their orders overnight (or hold positions longer than one day).
For example: With Snapex, the overnight fee is 0.045% of the total loan volume.
Applying the previous example, you would pay extra:
Overnight fee = Margin * (Leverage – 1) * 0.045% = 100 * (10 – 1) * 0.045% = 0.405 USD
Derivatives trading efficiency depends on your trading volume
Like other forms of trading, trading volume is one of the important figures that traders cannot ignore when choosing a platform.
In Derivatives trading, especially when using leverage. Traders’ trading volume can spike. The lack of trading volume can be a barrier for investors with large capital.
This emphasizes the importance of choosing a trading platform before placing any trade order. In Derivatives trading, due to the use of leverage, the trader’s trading volume can increase rapidly.
For example, when I tested an account with an initial balance of 1,000 USD on SnapEx. After only 10 trading orders, the total trading volume reached 10,000 USD. Assuming there is no Overnight Fee and leverage is 10x. The transaction fee I have to pay is: 10,000 * (10 – 1) * 0.15% / 10 = 13.5 USD.
It may seem like a small amount, but consider this. For professional traders who execute multiple trades per day and use higher leverage. This transaction fee can be quite high.
Some common mechanisms with Derivatives trading
Current Derivatives products are divided based on the operating mechanism. Mainly AMM and Order-book.
Order-book
Order-book is a common mechanism on centralized exchanges like Binance, and Okex. It lists all the sellers and buyers along with their prices. The transaction is executed when the highest bid price matches the lowest ask price. It allows users to place orders at a certain price and wait for the order to be matched on the order book.
The advantage of an order book is the ability to place orders at the desired time and price. Along with the ability to analyze price action based on trading volume. However, to trade effectively, a large amount of liquidity is needed.
AMM (Automated Market Maker)
AMM is an automated liquidity provision mechanism that does not use an order book like centralized exchanges. Instead, it operates based on a liquidity pool. Users participate in transactions with the liquidity pool by exchanging tokens with each other. Liquidity providers are those who supply tokens to the liquidity pool. To receive transaction fees from traders.
This mechanism relies on mathematical formulas to determine the prices of assets. It automatically provides liquidity to users. AMM trading increases liquidity and avoids the problems associated with traditional order books.
In summary, AMM and Order are two important mechanisms in Derivatives trading. Each type will have its advantages and disadvantages. It is suitable for users’ different needs and trading strategies.
How to make money on Derivatives crypto trading platforms?
To make money on Derivatives crypto trading platforms, you can apply some of the following strategies:
- Trend Trading: Track and capitalize on price trends of Cryptocurrencies. Buy when the market is going up (Long) and sell when the market is going down (Short).
- Derivatives Trading based on Technical Indicators (Technical Analysis): Use technical indicators such as MACD, RSI, and Bollinger Bands to make trading decisions. Chart patterns such as crosses, flags, heads, and shoulders can also be applied.
- Risk Management: Set stop-losses to minimize losses when the market moves against your prediction. Determine appropriate position size and leverage to avoid taking on excessive risk.
- Market Research: Keep track of news, events, and rumors that affect the crypto market. This information can affect prices and create trading opportunities.
In addition, you need to choose the right trading platform. Choose a highly reliable platform, secure system, and tools to support Derivatives trading. Including leverage, futures, and options.
See more: HTX exchange – Instructions for open an HTX account
Featured Derivatives trading platforms
The prominent Derivatives trading platforms today include:
- By bit: Crypto Derivatives exchange with a fast trading system and high leverage. The exchange is headquartered in Singapore and has representative offices in many countries.
- Binance Futures: An extension of Binance. It offers futures trading with multiple trading pairs and global coverage.
- FTX: Popular Cryptocurrency and Derivatives Exchange. Known for unique contracts like pre-IPO and options markets.
- BitMEX: One of the oldest and most popular cryptocurrency Derivatives exchanges. Especially with high leverage and Bitcoin-focused trading.
- Deribit: Specializes in Bitcoin options and futures trading. It is one of the leading cryptocurrency Derivatives platforms.
Each of these platforms has its own unique characteristics in terms of products, features, and market coverage. It suits different users’ needs and trading strategies.
Instructions for making Derivatives transactions
Trading futures contracts on Bybit exchange (example):
On Bybit’s Derivatives interface, you can see:
- Trading Pairs: Cryptocurrency pairs for you to choose from.
- Chart: Track coin price movements.
- Funding Rate: User fee paid every 8 hours.
- Order Book: Other users’ transaction history.
- Margin mode: Cross or Isolated, adjustable leverage.
- Buy/Long and Sell/Short: Place buy (Long) and sell (Short) orders.
- Trade History Information: Details of Long or Short orders after execution.
Step 1: Select margin trading mode and leverage level
- Cross: Use all the money in the account to maintain the position.
- Isolated: Use only the amount of money required for the position.
- Then choose the leverage level from x1 to x100.
Step 2: Enter the command
- Limit Order: Adjust the price as desired.
- Market Order: Buy/sell immediately at market price.
For example, buying 0.001 BTC with a Market order costs 27.01 USDT, with x10 leverage, you need 2.73 USDT. Confirm the order to complete the Derivatives transaction.
Derivatives – Opportunities and risks surrounding investors
Investing in derivatives in the financial sector offers great opportunities but also comes with worrying risks due to the high volatility of the market.
Crypto trading market advantages over Derivatives
- Margin Trading: This is a big advantage of Derivatives trading. It allows investors to take advantage of leverage to increase their returns by only contributing a small portion of the total transaction value (usually only 10% or less).
- High Trading Volume: The Derivatives trading market has a high trading volume. Research shows that in May 2020, the daily trading volume of crypto Derivatives products exceeded the $600 billion mark, which shows strong momentum from the growing interest of institutional investors.
Risks you may encounter when making money with Crypto Derivatives
- Derivatives trading offers great opportunities but comes with significant risks. Using leverage can result in losses that exceed your initial investment. It can even result in your account being wiped out.
- Additionally, Derivatives transactions may incur additional costs. For example, transaction, funding, and interest fees.
- The cryptocurrency market is prone to high price volatility. This increases the risk of derivative positions.
- Derivatives and options contracts often have complex operating mechanisms. Require in-depth market understanding and careful risk management.
- For traders, the use of leverage requires caution to avoid losing more than the initial investment.
Note: Derivatives trading can bring many opportunities but is not suitable for those who do not have experience and full knowledge of this market, which can lead to the loss of all invested money.
Conclude
Crypto Derivatives trading can lead to huge profits but also carries the risk of serious losses. Therefore, before starting to participate, you need to have a solid trading mentality, stable capital, and extensive knowledge of trading operations. Above is a summary of information about Derivatives trading that Crypto Trading has shared. Hopefully, the article will be helpful for those who are new to this market. Don’t forget to follow the page to update the latest news!
Frequently Asked Questions
What are Derivatives in Crypto Trading?
Derivatives in Crypto trading are financial contracts whose value is derived from cryptocurrencies: Bitcoin, and Ethereum. These Derivatives allow users to bet on the price direction of assets without owning them.
What are the most common types of Derivatives contracts?
Popular types of Derivatives contracts in Crypto include futures contracts. Options contracts, CFD contracts (contracts for difference).
What are the Benefits of Crypto Derivatives Trading?
Crypto Derivatives trading allows investors to leverage to increase profits. It hedges existing positions and exploits market opportunities without physically owning the crypto assets.
