So, you’ve been following the crypto world for a while now and have decided that you want to get in on the action. Excellent decision! But with so many options out there, it can be tough to know where to start. One popular way to get involved is through crypto derivatives. Let’s take a look at what they are and all you need to know to get started.
What are Crypto Derivatives
In simple terms, a derivative is a security that gets its value from an underlying asset. This underlying asset can be anything from stocks and bonds to commodities and currencies. With crypto derivatives, the underlying asset is, of course, cryptocurrencies.
Crypto derivatives can take many different forms. The most popular ones are futures contracts, options contracts, and swaps.
Futures contracts are agreements to buy or sell an asset at a set price at a specific time in the future. On the other hand, options contracts give the holder the right, but not the obligation, to buy or sell an asset at a set price at a specific time in the future. Swaps are agreements to exchange one asset for another at a set time in the future.
Now that we know what crypto derivatives are, let’s take a closer look at each type.
Futures Contracts
Futures contracts were one of the first types of crypto derivatives to be introduced. They were launched by the now-defunct Mt. Gox exchange in 2010 and were quickly followed by other exchanges.
Futures contracts were created to solve a problem that many cryptocurrency investors were facing. At the time, there was no good way to bet against the price of Bitcoin. If you thought the price would go down, your only option was to sell your Bitcoin and hope to buy it back at a lower price. But what if the price didn’t go down? You would miss out on all the gains that others were making.
Futures contracts allowed investors to bet against the price of Bitcoin without selling their Bitcoin. And because they are traded on exchanges, they are easy to buy and sell.
Options Contracts
Options contracts were introduced a few years after futures contracts. And like futures contracts, they allow investors to bet on the price of Bitcoin without selling their Bitcoin.
The main difference between options contracts and futures contracts is that with options contracts, you only have the right to buy or sell the asset, you are not obligated to. This means that with options contracts, there is less risk than with futures contracts.
Swaps
Swaps are a type of derivative that is slowly gaining popularity in the cryptocurrency world. They were first introduced by the LedgerX (now FTX US derivatives LLC) exchange in 2017 and have since been offered by a few other exchanges.
Swaps are similar to futures contracts in that they are agreements to buy or sell an asset at a set price at a specific time in the future. The main difference is that the underlying asset is usually not cryptocurrencies with swaps. For example, FTX offers USD/BTC swaps, which means that you agree to exchange US dollars for Bitcoin at a specific future price.
Why Trade Crypto Derivatives?
There are many reasons why you might want to trade crypto derivatives. Here are a few of the most popular ones:
To hedge your portfolio
If you’re worried about the price of Bitcoin going down, you can use futures contracts to bet against it. This way, you can still hold on to your Bitcoin and potentially make money if the price does go down.
To speculate on the price
If you think the price of Bitcoin will go up, you can buy a futures contract or an options contract and make money if you’re right.
To gain exposure to altcoins
Many exchanges offer futures contracts and options contracts on altcoins. This allows you to get exposure to altcoins without actually having to own any.
To trade 24/7
Crypto derivatives can be traded around the clock, even on weekends. This is unlike the spot market, which is only open during business hours.
How to Trade Crypto Derivatives
If you want to trade crypto derivatives, you’ll need to do so through a cryptocurrency exchange that offers them. Here are a few of the most popular exchanges that offer crypto derivatives:
BitMEX
BitMEX is one of the largest and most popular cryptocurrency exchanges. It offers a wide range of derivatives, including futures contracts, options contracts, and swaps.
Deribit
Deribit is another large cryptocurrency exchange that offers futures contracts and options contracts.
OKX
OKX is a popular cryptocurrency exchange that offers futures contracts, options contracts, and swaps.
Risks associated with trading Crypto Derivatives
Like any type of investment, there are risks associated with trading crypto derivatives. Here are a few of the most important ones to be aware of:
Volatility
Cryptocurrencies are notoriously volatile. This means that the prices can go up and down very rapidly. This can make it difficult to predict what will happen in the future and make it easy to lose money if you’re not careful.
Leverage
Many exchanges offer leverage, meaning you can trade with more money than you have in your account. This can help you make more money if the price goes in the right direction, but it can also amplify your losses if it goes against you.
Counterparty risk
When you trade derivatives, you’re entering into an agreement with another person. This means that there is a risk that they will not fulfill their end of the agreement. This is known as counterparty risk.
Liquidity risk
Cryptocurrency exchanges can be very illiquid, making it difficult to buy or sell large amounts of cryptocurrencies without moving the price. This is especially true for less popular cryptocurrencies.
Tips for starting out in Crypto Derivatives trading
Here are a few tips to help you get started in crypto derivatives trading:
Start small
Don’t risk more money than you can afford to lose. It’s best to start small and gradually increase your investment as you become more comfortable with the market.
Use stop-loss orders
A stop-loss order is an order to sell a security when it reaches a certain price. This can help you limit your losses if the price goes against you.
Be patient
Cryptocurrencies can be volatile, so it’s important to be patient and wait for the right opportunity to enter the market.
Have an exit plan
Before you enter a trade, know when you’re going to sell. This will help you stay disciplined and avoid impulsive decisions.
The bottom line
Crypto derivatives can be a great way to trade cryptocurrencies. However, it’s important to know the risks before starting trading. You can make money even in a volatile market if you’re patient and disciplined.
Recommended exchanges and brokers for trading Crypto Derivatives
Kraken
If you’re a DeFi (decentralized finance) fan, you’ll love Kraken exchange! It’s one of the most popular exchanges out there, and for good reason – it’s easy to use and has a ton of features. Kraken is known for its low fees, a wide selection of assets, and high security. In recent years, Kraken has also become a leading platform for crypto derivatives trading, with various futures, options, and other instruments available.
One of the most unique things about Kraken is its focus on defi. Kraken was one of the first exchanges to list defi protocols such as Maker and Compound, and it continues to list new protocols as they launch. This makes Kraken a great place to get started with defi trading.
In addition to its defi offerings, Kraken also provides a wide range of traditional crypto assets, including BTC, ETH, XRP, LTC, and BCH. You can also trade various fiat currencies on Kraken, including USD, EUR, CAD, and GBP. Kraken is a great all-around exchange for spot and derivative trading.
Bitfinex
If you’re looking for a comprehensive crypto derivatives exchange, Bitfinex is definitely worth checking out. They offer a wide range of defi products, and their platform is incredibly user-friendly. Plus, their customer support is excellent. In terms of negatives, the main one would be that their fees are a bit on the high side. But overall, Bitfinex is definitely a top-tier crypto exchange.
Binance
Binance is one of the leading cryptocurrency exchanges out there, and for good reason. Not only does it offer a wide range of features and trading options, but it also supports a number of popular cryptocurrencies, including Bitcoin, Ethereum, Litecoin, and Binance Coin. And if that wasn’t enough, it also offers a variety of defi tokens and crypto derivatives. In other words, whether you’re a seasoned trader or just getting started in the world of cryptocurrency, Binance has something to offer you. So what are you waiting for? Check it out today!
eToro
eToro is a digital asset exchange that offers a wide range of crypto assets for trading. In addition to traditional crypto assets like Bitcoin and Ethereum, eToro also offers a variety of defi assets and crypto derivatives. For example, eToro’s Defi Center allows users to trade a variety of defi protocols, such as Maker and Compound. In addition, eToro’s Derivatives Marketplace offers a wide range of crypto derivatives, such as futures and options. Whether you’re looking to trade traditional crypto assets or get involved in the world of defi, eToro is worth checking out!
TD Ameritrade
defi on Ameritrade? You bet! Starting at 6pm EST on Monday, December 21, 2020, Ameritrade began trading Bitcoin futures on the CBOE exchange. These new contracts are cash-settled and based on the Gemini bitcoin auction price. So, what does this mean for defi? Well, for starters, it opened up a whole new world of possibilities for crypto derivatives.
With Ameritrade now offering bitcoin futures, we could see a surge in demand for other crypto assets such as Ethereum and Litecoin. This would provide a much-needed boost to the defi ecosystem and help drive down lending rates. Of course, only time will tell how this new development will play out. But one thing is for sure: the defi space is now much more exciting!
Robinhood
Robinhood is a defi protocol that allows users to trade crypto derivatives. It launched on the Ethereum mainnet in August 2020 and is one of the most popular defi protocols. The protocol’s genesis smart contract has a total value locked (TVL) of over $1 billion. Robinhood’s key feature is its use of “oracle contracts” to price derivatives. These contracts are designed to resist manipulation and provide accurate prices for derivative contracts.
Robinhood is an attractive option for traders looking for a fair and transparent platform. The platform also offers many other features, including support for multiple languages, margin trading, and shorting. Overall, Robinhood is a popular defi protocol that offers a great user experience and a fair trading environment.
Final thoughts
Crypto derivatives are a great way to trade cryptocurrencies. They offer many benefits, including the ability to trade on leverage, hedge against price swings, and speculate on the future price of assets. However, it’s important to remember that crypto derivatives are a high-risk investment. So, make sure you do your research and only invest what you can afford to lose. With that said, we hope you found this guide helpful. Happy trading!
FAQ
What are crypto derivatives?
Crypto derivatives are financial instruments that derive their value from underlying assets. The most common type of asset is cryptocurrency, but derivatives can also be based on other assets, such as stocks, commodities, and fiat currencies.
What are the benefits of trading crypto derivatives?
There are many benefits to trading crypto derivatives. For example, they offer the ability to trade on leverage, hedge against price swings, and speculate on the future price of assets.
What are the risks of trading crypto derivatives?
Crypto derivatives are a high-risk investment. The value of your investment can go up or down, and you may not get back what you put in. So, make sure you do your research and only invest what you can afford to lose.
Which exchanges offer crypto derivatives?
There are several exchanges that offer crypto derivatives. Some of the most popular include eToro, TD Ameritrade, and Robinhood.
