Bitcoin Derivatives

Photo by You X Ventures on Unsplash

Today’s emerging digital revolution is leading a radical shift away from the conventional monetary exchange model as digital money like cryptocurrencies come to prevalence in modern society. Despite cryptocurrency’s ubiquity, there is still an apparent need to drive mass adoption, and one way to do it is through crypto derivatives like Bitcoin futures. Just like traditional derivatives such as Futures and Options, crypto derivatives like Perpetual Swaps contracts also allow for equal if not higher leverage in the crypto markets than that of derivatives of the traditional financial markets.

Derivatives – What are they?

Photo by Nathan Dumlao on Unsplash

A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial security. Common securities include bonds, commodities, currencies (or cryptocurrencies), interest rates, market indexes, and stocks. The value of a derivative is derived from the value of its underlying financial security, and this means that inherently, derivatives have no value to them. For example, a Bitcoin futures contract is a derivative contract that derives its value from its underlying asset – Bitcoin.

Traditional Derivatives

Photo by Scott Graham on Unsplash

The four primary forms of traditional derivatives are Options, Futures, Forwards, and Swaps.

Options – An Options contract enables a buyer and seller to transact with an asset at a predetermined price within a definite timeline, except that traders are not mandated to buy assets in this contract.

Futures – Contrasting to an Options contract, a Futures contract mandates a trader to either buy or sell an asset at a predetermined date and price.

Forwards – Customized to fit the needs of traders, Forwards contracts are normally conducted Over-the-Counter (OTC) on such exchanges with consideration of risk factors.

Swaps – Swaps contracts are made between two parties solely to profit by exchange currencies (crypto) at a future predetermined date. Common assets exchanged are bonds, notes, and loans. (E.g. Crypto Perpetual Swap)

Crypto Derivatives

Photo by André François McKenzie on Unsplash

Like a traditional futures contract, crypto derivatives enable investors to gain exposure to Bitcoin without holding the underlying cryptocurrency and speculating on the future price of Bitcoin. However, the larger movement in the underlying cryptocurrency assets of crypto derivatives results in higher volatility, therefore allowing for a higher return.

According to a study done by Eurekahedge in 2019, crypto derivative funds like Bitcoin futures have a higher average return of 16% as compared to that of hedge funds at 10.7%, typically the top performing funds in traditional financial markets.

The first Bitcoin futures trading was launched by the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) in 2017 during the bullish crypto market.

For example, Bitcoin investor, Kimberly, buys a Bitcoin futures contract worth $10,000, she would gain exposure to $10,000 worth of price movements of the Bitcoin futures contract. Although Kimberly does not have ownership of the Bitcoin, she would still be able to experience akin profits or losses without having an actual trade of USD and Bitcoin.

Who are the Derivatives Traders?

Photo by KAL VISUALS on Unsplash

Arbitrageurs – Arbitrageurs are people who leverage on the price differences offered in different products and exchanges, resulting in them earning minimal profits, yet they improve the market efficiency simultaneously.

Market makers – Market makers capture bid-ask spread and take advantage of maker rebates, providing liquidity to both sides of the market.

Speculators – Speculators bet on price movements of the underlying assets of derivatives

Hedgers – Hedgers limit their exposure to market risks by trading with other open positions

An example of a crypto hedge derivative trader is a Bitcoin miner. A Bitcoin miner hedges their holdings against a price fall.

How can you Benefit from Trading Crypto Derivatives?

Photo by Tachina Lee on Unsplash

Leverage – Trading with leverage makes it possible for crypto traders to control the same size as they would by holding a position on the underlying asset, but with a smaller amount of capital. E.g Derivative trading platforms like DigiDeriv offer up to a 100X leveraged trading. 

Lower fees – Unlike its underlying crypto spot market, crypto derivatives offer lower trading fees, even offering rebates for maker orders.

Net short positions – With up to 100X leverage crypto derivatives can offer, traders can take net short positions and profit from their trades even with falling prices. 

Hedging – Derivatives allow traders to lower their exposure to markets without selling their cryptocurrencies’ underlying assets. 

Capture price differences – Trading crypto derivatives allows traders to take advantage of price differences of a derivative and its underlying asset. This is possible even between two derivatives. 

Emerge of Crypto Derivatives

Photo by Daria Shevtsova on Unsplash

As cryptocurrencies like Bitcoin take the lead in shifting the masses to take on crypto adoption, crypto derivatives are bound to emerge as a new digital revolution, diverting away from conventional monetary exchange models.

For related articles, read DigiFinex Academy.

You can share this post on

Reletad Post

What Is NFT Real Estate and How Is It Changing the Real Estate Industry?

NFT real estate is virtual property you can purchase on a metaverse platform. 

There are many use cases for NFT real estate but it is most commonly used as a space to socialize, work, and game.

The value of NFT real estate can be affected by its utility, project, and demand. 

Thanks to blockchain technology, the tokenization of real-world assets (such as real estate) has made the industry’s processes more efficient, transparent, and secure.

Arbitrum Project Introduction

From 2020 to now, many public blockchains such BSC, Solana, Polkadot, and Avalanche raced to take over ETH’s users and market. Their advantages on low gas fee and quick transaction time made ETH eager to release effective Layer2 program to expand the capacity. Since Arbitrum was released, its ecosystem grew up rapidly and already owned many mature and popular featured projects on different race tracks.

Polkadot, the King of Cross-chain Explained

What is Polkadot? Polkadot is a heterogeneous blockchain founded by Gavin Wood, former CTO of Ethereum, is an impeccable blockchain project that is perfect in every sense. Its founder, Gavin Wood, is the author of the Ethereum White Paper and the person who knows the defects of Ethereum at heart. Polkadot was founded with the idea to solve Ethereum’s shortcomings and replace it as the “King of the Public Chain”. Read to find out more!

Fil Mooned Right Away After I Sold It. Am I One of the Weak Hands?

“Fil mooned right away after I sold it. I am the weakest hand in the crypto world.” said one of my friend who has been trading cryptocurrency for many years. He is a user during the public sale and bought FIL at the price of $2. After the FIL is unlocked, he sells coins wildly every day. But even so, he still hates the slow process of unlocking, so he directly sold all the publicly purchased Fil at the price of dozens of dollars.

What is EIP-1559? How will it affect Everyday Users? Will it Pump Up ETH Price?

What is EIP-1559? How will it affect Everyday Users? Will it Pump Up ETH Price? The EIP-1559 we will be talking about in this article is an example of Ethereum improvement proposal. This proposal was first put forward in November 2018 by Eric Conner, an ETH developer. It aims to reform the GAS fee bidding system of ETH, so to reduce the cost for users to transfer money on ETH.

DigiFinex Apollo IEO Project HGOLD Token Sale Announcement & Sponsoring Michael Madsen’s Imprint Ceremony in Hollywood

5 rounds of HollyGold Limited Token Sale came to an end smoothly last Friday, Nov 13rd, 2020. Not only was it a successful token sale, its’ results were indicating a positive growth in the project HollyGold. HollyGold has also sponsored Michael Madsen at his celebratory imprint ceremony in Hollywood recently.

%d bloggers like this: