Products whose value changes according to the change in the value of a source asset are called Derivatives. A Bitcoin market, for example, allows investors to buy and sell Bitcoin at any time, but also imposes certain limitations. Investors can only make money when the price of Bitcoin rises, or conversely, when the price of Bitcoin falls, anyone holding BTC will suffer.
On the other hand, a Bitcoin derivative could allow people to trade contracts that track Bitcoin price without actually having to own any Bitcoin. So, just like in traditional financial markets, derivatives derive their value from assets such as stocks, bonds, interest rates, commodities, currencies, and cryptocurrencies.
Although derivatives are often used to hedge against risk, investments in these products also allow investors to speculate on the price of a value asset.
What Are Crypto Derivatives?
There are three main types of crypto derivatives: crypto futures, crypto options and perpetual futures.
Crypto futures involve an agreement between a buyer and seller to sell an asset in the future, with the date and amount of the transaction predetermined. Futures crypto transactions are a type of crypto derivatives frequently used by institutional investors.
Crypto options, like futures, are crypto derivatives that allow the investor to buy or sell an asset at a certain price at a future date. However, as the name suggests, it gives the investor the option not to buy or sell the agreed asset. This feature sets it apart from crypto futures.
The crypto derivative, also known as a perpetual futures contract or perpetual swap, differs from the others in that the contracts do not have an expiration date. Investors can hold contracts for as long as they want as long as they pay holding fees, called the funding rate.
How to Trade with Crypto Derivatives
For investors planning to trade crypto derivatives, the first step is to sign up with a crypto exchange or traditional exchange like FTX that facilitates crypto derivatives trading. FTX is listed among the top 10 crypto derivatives exchanges according to Coin Market Cap data, and is a cryptocurrency exchange where you can safely track values such as Bitcoin, Ethereum, Avax coin price. Here are the steps a cryptocurrency trader should follow:
- Compare the features offered by different crypto exchanges, including margin, payment term, producer/recipient fees, and applicable withdrawal limits. Choose a crypto exchange that provides the best value for the fees it charges. For example, FTX offers a maker fee of 0.02% and a buyer fee of 0.04%.
- Open an account on a crypto exchange and fund your account with crypto transfers.
- Focus on crypto derivatives that traders are interested in trading. Understand how margin works and choose a margin rate. New traders should initially use a minimum margin.
- Buy futures contracts through a marginal deposit.
- Hold futures contracts until maturity. Close the position before expiry and record profit or loss.
Finally, Ideally, investors should develop a plan before trading crypto derivatives. Some exchanges offer lower fees for their native tokens, so it might be wise to use them for cost efficiency.
Crypto derivatives trading offers the right investor a variety of growth prospects. The trick is to design a strategy before starting crypto derivatives. A trader should analyze and understand the risks associated with derivatives trading before making the first trade
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