Cryptocurrency Derivates are financial products where values are derived from an underlying crypto asset (like Bitcoin). The cryptocurrency Derivates are traded in two forms – options and futures. Both are financial agreements to sell or buy a specific quantity of a crypto asset at a particular price in the future.
If you want to start trading of cryptocurrency futures or options, you need to sign up with a cryptocurrency derivatives exchange. These exchanges provide a marketplace to buy and sell the futures trades. You need to understand futures, options, and perpetual swap to understand the working of the derivatives exchanges.
What Are Futures Contracts?
As mentioned earlier, they are financial agreements to buy or sell a specific quantity of an underlying crypto asset at the traded price. The futures contracts have an expiry date that denotes when the buyer and seller of the futures contracts should settle their outstanding positions. The perpetual swap is also a variant of the futures with the difference of removal of the expiry date.
Bitcoin futures contracts let the traders trade on the value of Bitcoin without actually owning it. Most futures contracts are cash-settled, which means traders receive the return in currency. Some derivatives exchanges have introduced physical settlements where the traders receive coins or tokens once the futures contracts close.
In futures trading, the cryptocurrency derivatives exchange standardizes the contract. The size of the futures contract relies on the standard futures decided by the exchange. In some cryptocurrency exchanges, a single contract could be worth $10, while in another exchange, it could be only worth $1.
The exchanges also standardize things like the expiration date and strike pricing in futures trading. Also, they ensure that the futures pricing is mentioned to ensure transparency in the trading.
What Are Options?
Options are a type of derivative security. It is an instrument that gives the buyer the right to buy or sell the underlying asset (cryptocurrency) at a specific price at a particular time. The options are not an obligation for the buyer, but a seller should deliver the asset if the buyer chooses to buy.
What Are Perpetual Swaps?
Perpetual swaps are a type of derivative trading where the futures contract does not have an expiration date. When cryptocurrency traders have a perpetual trade, they are required to pay funding fees. The derivatives exchanges have a mechanism that ensures the convergence of perpetual price to the actual price through the exchange of currency swaps between long and short users.
How Do Derivatives Exchanges Work?
The cryptocurrency derivative exchange-traded derivate is a financial instrument traded on a regulated exchange. The value of the cryptocurrency derivate is based on the value of another asset (cryptocurrency). These cryptocurrency derivates can be used to speculate on a wide range of currencies, equities, and commodities.
- Base Currency Can Vary
On the derivatives exchange, you can trade these financial instruments on-base currencies such as USD or BTC. The base currency for trade could vary from exchange to exchange, depending on the currencies supported by the particular exchange. The cryptocurrency derivatives do not have any direct value. Hence, the value of the financial contract is based on the expected future price movement of the underlying cryptocurrency.
- Access to Futures Trading
A futures exchange enables traders to access futures trading. The manager of a cryptocurrency derivatives exchange has to increase the volume of the traded asset underlying coins. Some cryptocurrency trading exchanges also offer margin trading. These exchanges have liquidity providers that lend money to the traders for buying futures, and the traders have to give back the money with some interest.
- Clearing Services
The derivatives exchange also offers clearing services that ensure no parties in the contract have to worry about the other party fails to deliver as per contract. There might be several firms providing clearing services, but it is the derivatives exchange that standardizes the charges and also overlooks the process.
How Are the Initial Prices Determined?
The Chicago Board Options Exchange (CBOE) started listing bitcoin futures for three-near term serial months (January, February, and March). Each futures contract price is one bitcoin. The Market makers set an initial price every month after which trading begins. The minimum price interval is $10.00 per contract. The contracts are traded and settled in cash (US dollars).
Due to high gains, cryptocurrency trading is attracting investors and derivatives traders across the world. Before you actively get involved in cryptocurrency trading, you need to be careful while selecting the derivatives exchange.
Get complete information about different types of cryptocurrency derivates and the way the exchanges work. It will help you to make informed decisions, tread cautiously, and reap high returns.
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Kat Irving is a reporter for Diving Daily. After graduating from NYU with a master degree in history, Kat got an internship at WABC-TV New York and worked on profiling local businesses. Kat was also was a columnist for the NPR. Kat mostly covers business and community events here at Diving Daily