Crypto Derivatives: If you’re familiar with the world of cryptocurrency, you may have heard of crypto derivatives and futures in advanced trading. Crypto derivatives offer traders opportunities to participate in advanced trading with greater control and flexibility.
While traditional spot markets require traders to hold their coins and wait for a price increase to sell or otherwise experience a loss, crypto derivative trading allows users to trade contracts that follow the currency’s price without either party having to own that coin. Crypto derivatives trading requires extensive knowledge of the marketplace to be successful. Here’s a quick breakdown of the types of crypto derivatives out there.
Crypto derivatives are essentially contracts between two parties that derive their value from an underlying asset; in the case of cryptocurrency, that asset would be the coin itself. Crypto derivatives allow traders to make deals with each other without actually having to own the asset itself beforehand. One trader bets the price of an asset will go up over time; the other thinks it will go down, and they are paired together in this contract. At the end of the contract period, if the price has gone up or down, the incorrect trader will pay the other the price difference.
So, if you bet BTC will go up but drops from $1000 to $900, you will pay the other trader the $100 difference. This form of trading allows users to earn money without ever owning BTC, and contract winners can earn money even when the price of an asset drops. Crypto futures and crypto options are the most popular forms of crypto derivatives. This type of advanced crypto trading comes with many risks but can be highly lucrative for certain traders. Here’s a breakdown of these two most popular forms of crypto derivatives.
Crypto futures are contracts, as explained above; an agreement between two parties to buy or sell crypto at a set price at a specific future date. Neither of the traders has to hold any of that cryptocurrency, and when it comes time to settle the contract, both parties can agree to make payment in the form of USD or any other agreed-upon currency. Crypto futures are unique based on the specific date selected in the future to settle the contract. Futures contracts can be set for a week out, a month, etc., through your exchange platform.
Traders involved in the contract choose to either go ‘long,’ meaning they believe the price will increase by that time or ‘short,’ telling they think the price will decrease. You are then matched with someone else who bet the opposite way, and when the contract time comes, the contract will be settled, and one of the traders must pay the other.
Crypto options are similar to futures but offer the traders the opportunity to delay contract payment. With crypto options, traders can select a specific future time and price of the crypto, and at that time, they can either choose to ‘call’ and buy the crypto at that previously agreed upon price, or they can ‘put,’ which gives them the right to sell.
The owner of the contract has the option to exercise either option or none at all, leaving the contract to expire. All crypto options require a premium to be paid to enter the contract, so even if you choose not to call or put at the specified time, you will still lose the amount you paid for the premium.
Both crypto derivative options have different benefits and drawbacks for investors, and there are even more derivative options for advanced traders. You can join an online crypto community like FTX to learn more about crypto derivatives and even begin trading crypto options through the FTX platform. Start your advanced crypto trading today.