Feb 24, 2022 · 3 min read · cat
The cryptocurrency market has always been turbulent, although the previous weeks have been especially stormy with continuous dips. The crypto market size is still insignificant compared to other regular currencies and gold, which indirectly means that whales (a group of people holding huge quantities of crypto coins) can impact the market. Merely selling their holdings is enough to bring the market down.
Speculation is the lifeblood of bitcoin and the cryptocurrency market in general. To profit, investors bet on whether prices would rise or fall. The outcome of these speculative bets always results in a large inflow of cash or a large outflow of cash, resulting in volatility.
Owing to this, there is a need to adopt another option that will minimize loss and increase profit for investors. Investors devised another new form of trading, a good option for diversifying investment portfolios known as crypto derivatives. Crypto derivatives allow investors to speculate on Bitcoin and cryptocurrencies’ volatility without needing to own the cryptocurrency itself. In summary, Secondary contracts or financial tools that derive their value from a primary underlying asset are known as crypto derivatives.
Reductive Explanation of Crypto Derivatives
Reductively, a Bitcoin spot market allows traders to buy and sell Bitcoins at any moment, but this comes with some restrictions. For instance, investors can only profit if the price of Bitcoin rises. Anyone holding BTC will lose money if the price falls. Even those who were fortunate enough to sell before a substantial drop and want to repurchase at a lesser price need prices to rise again. If they don’t, there’s no way to make money. Another feature of spot markets is that they compel traders to keep the assets they want to speculate on in their possession.
On the other hand, A Bitcoin derivative allows investors to trade contracts that track the price of Bitcoin without ever having to hold any of the Bitcoin.
These contracts are agreements that you get into with a third party. Let’s go back to BTC and pretend that you believe the price will rise while someone else feels it will fall. You and this other speculator can agree that after a given amount of time, once the price has changed in any way, one of you will have to pay the other the price difference.
Let’s say the price of Bitcoin is $40,000, and you can bet it’ll rise. It’ll go down, your counterparty predicts. The opposing trader will pay you $1,000 if the price rises to $41,000 by the time you settle the contract. You’ll have to pay $1,000 if the price rises to $39,000. As you can see, a trader or investor can profit even when prices fall by using such a deal or contract without ever owning the underlying asset. Though this is a general description of how bitcoin derivatives function in terms of trading, the reality is that they come in many different forms.
At this moment, a trader can either go long (bet that the price will rise) or short (bet that the price will decrease). When you open a position in whichever way you like, the exchange platform effectively matches you with someone traveling in the opposite direction. When the contracts are due to be settled a week later, one of the traders will have to pay the other. If you choose to go short, you make a profit and the price moves down a week later. If the price has risen, you have lost money.
We have crypto futures, Options, perpetual contracts, and swaps as different forms of Crypto derivatives depending on the conditions of a contract.
Crypto derivatives trading is a fantastic option for new and experienced crypto investors. Depending on how much risk you’re willing to take, you can choose from various possibilities.
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