The crypto market is in many ways similar to the stock market. While we cannot deny its uniqueness in being a digital asset, the procedures for trading and making profits run parallel to the stock market.
Derivatives are one such example. In general terms, derivatives are financial products whose value depends on another asset. Derivatives can be contracts or securities and get their value from (crypto) currency, commodities, market stock, interest rates, and bonds, among other assets.
Over the years, derivatives have become popular financial tools. In the crypto market, derivatives are traded among customers (C2C) and on exchanges, though the way they are regulated and traded is different. Businesses use crypto exchange software development services to integrate derivatives trading on their platforms.
Types of Derivatives
Derivatives are usually divided into the following types.
- Futures: The buyer is obliged to purchase an asset at a price previously agreed upon that has been set for a certain date in the future. Traded on the exchanges, futures are standardized contracts.
- Swaps: As the name suggests, these derivatives are used to exchange one type of cash/ crypto with another to make a profit at a set time in the future. Loans, bonds, etc. are the assets exchanged by switching from a fixed interest rate to a variable interest rate or vice versa.
- Options: These are again similar to futures where the contract allows the seller or buyer to buy or sell the said asset at the pre-fixed price within the specified timeline. But the difference is that with options, it is not mandatory for the trader to the asset as per the contract.
- Forwards: Forwards are similar to futures except that they can be customized to suit the requirements of the trader. Flexibility is an advantage of trading forwards. These are normally traded via OTC (Over the Counter), and hence it is necessary to consider the various risk factors associated with it.
- Perpetual Futures Contract: This contract doesn’t expire in time. The trader can hold it for any time and close it whenever they want to. These contracts are highly volatile as they are used as a funding mechanism and so have to be traded with extra care.
Use of Derivatives in Crypto Trading
Derivatives are usually used to speculate on the future or handle risk quotient in the volatile market. In the crypto market, derivatives are used to get benefits from the fluctuations in the price of the cryptocurrencies.
By using cryptocurrency exchange software development, some platforms are offering traders to trade in derivatives and contracts, though it is still quite limited to few altcoins and Bitcoin.
Why is Crypto Derivatives Important?
With the success of existing crypto exchanges that offer trading in derivatives, it can be said that there will be an increase in the number of platforms providing options and futures trading. Analysts and experts are of the opinion that derivatives will continue to gain popularity as more…