Various derivatives of the crypto ecosystem
The cryptocurrency ecosystem is rich in a variety of financial products and services. Some of the most popular among these offerings are crypto derivatives. Much like the ecosystem that surrounds it, crypto derivative trading presents virtually an endless range of opportunities. This blogpost will explore the many leading types of crypto derivatives, from flat contracts to options trading, and the differences between them.
In finance, a derivative is an investment that derives value from a underlying asset (i.e., bitcoin). Allowing traders to venture on the value of a underlying asset with the opportunity to harness leverage, crypto derivatives – such as bitcoin futures contracts – provide a valuable avenue for speculation.
Over the past few years, Bitfinex * has embraced this growing interest, developing its platform to incorporate a wide variety of derivative products, which are discussed in detail below.
Explain the future market
The most common derivative – is the crypto futures contract. During bitcoin futures trading, two parties enter into the purchase or sale of BTC at a specified date for a predetermined amount.
However, crypto futures contracts are more than just venturing on a underlying asset; they also present a valuable hedgerow opportunity. For example, traders with an existing spot position in BTC can mitigate price fluctuations by taking an opposing position within bitcoin’s futures contract.
Unlike random trading, crypto derivatives markets use leverage. Leverage enables traders to borrow capital to finance a contract. Leverage enables traders to borrow capital to finance a contract. Leverage is typically used to fund a larger position without the need for a significant upfront equity stake.
Flat contracts (and how they differ from crypto futures)
Flat contracts operate just like a traditional crypto futures deal – with one essential distinction: they do not expire.
Flat contracts are the best of both worlds, allowing the intuition of current market trading while protecting the future market benefits, such as leverage, and risk hedging.
By allowing indefinite expiration, traders can hold office for as long as they can finance it. This enables a more convenient way of trading futures, with funding being made every 8 hours to ensure the job stays open.
What is Options Trading?
Options give traders the right to buy or sell an underlying asset without the obligation to buy or sell it. Similar to futures, traders who undertake a call option or a put option agree a fixed price and duration for the contract.
However, unlike traditional future agreements – where parties to both sides of the trade are required to buy / sell at an end – the options do not ask participants to buy / sell, just make the option available.
But how does option trading work?
Using a real-world example, let’s assume that a trader wants to buy 10 bitcoin at $ 10,000 per BTC. However, given the market tendency for wild swings, the trader is concerned about a fall in prices. With call options, they can buy the opportunity to buy 10 BTC for a sum of $ 100,000 for a fixed period. Once the period ends, no matter whether the price rises or plummets down within that time, the trader is locked in choice to buy or walk away.
Let’s imagine that by the end of the expiration period, bitcoin had managed a 2x to $ 20,000 move. The trader has to buy bitcoin for the pre-determined option rate and sell it at market price – making a total profit of $ 100,000.
Bitfinex Crypto Derivatives
Bitfinex Derivatives currently offers markets in a flat future with leverage up to 100x. A recent interview with Bitfinex CTO Paolo Ardoino revealed that Bitfinex Derivatives is looking to adopt options trading inside Q1 from 2020.
Derivatives provide multiple benefits, offering a low barrier to entry as well as allowing the ability to hedge bets on existing positions. While the underlying market offers a one-dimensional path of speculation, derivatives open up a unique range of trading opportunities.
* The derivatives platform is provided by iFinex Financial Technologies Limited. References to Bitfinex Derivatives in this post are references to iFinex Financial Technologies Limited.