What are crypto derivatives and what are essential derivatives types exist in the crypto market? Let’s take a look at how derivative financial instruments can reduce risks and increase return on investment.
In addition to the usual asset trading, there is an opportunity to use various financial instruments on the crypto market. One of them is crypto derivatives, which are essentially an agreement between a buyer and a seller for the future value of a digital asset. The participants in this transaction do not own the underlying asset for which the contract was drawn up. In this case, the subject of the transaction is the right to perform the contract.
What crypto derivatives are:
1) Futures is a contract to sell or buy an underlying asset in the future at a predetermined price. An example of such a contract is a pre-order of a product, in which the buyer pays a predetermined price, but receives the product later
2) Forwards are almost the same as futures, however, this contract is less standardized and is not traded on exchanges. Forwards are traded on over-the-counter (OTC) markets, but this agreement also implies the purchase of the underlying asset in the future at a fixed price
3) Options is a contract that gives the right, but does not oblige, to buy or sell an underlying asset in the future at a predetermined price. An example of options in real life is asking the seller to hold the item for a while
4) Swaps are a tool that includes two contracts at once. The first contract is aimed at the purchase or sale of the underlying asset at the time of its conclusion, and the second – indicates the conditions for the sale or purchase of the underlying asset in the future. Swaps are considered a more complex option for futures. Example: buying a product from a supplier and concluding an agreement on the supply of the same product to the end consumer in the future;
5) CFD (contract for difference) – an agreement for the difference in the prices of the underlying asset. If the asset has fallen in price during the term of the contract, the buyer pays the difference. In case of an increase in the price of an asset, the seller pays it. A simple example of such a contract is a special offer in some stores in which the seller promises to refund the difference in price if the buyer finds the item cheaper.
What do you need to know before using crypto derivatives?
Derivatives for such highly volatile assets as cryptocurrencies should be used only after a careful study of the instruments themselves and how they work, otherwise there is a high risk of not only losing funds, but also going into a stable minus. I recommend that beginners take extra care with all derivatives.
Usually derivatives are targeted at active traders and speculators who constantly enter into transactions. Due to their low fees and built-in leverage, crypto derivatives are especially popular among speculators.
It will not be possible to sit out the market downturn in derivatives, since if the account does not have enough money to maintain the position, it will be forcibly closed.
For beginners, it is better to get started with experience in trading, master the basic concepts and learn how to feel the signals for market movement. After that, you need to develop your own strategy that takes into account the risks in a crisis and high volatility of the economy, and only then start working with crypto derivatives.
When can crypto derivatives be used?
1) The risk of falling quotes. Futures can be used to sell an asset and make money on falling prices, and options can insure an investor against the risk of a decline in quotes. For example, for mining farms that predict the production of cryptocurrency over a certain period of time, options can become a tool to protect against depreciation when the farm’s profitability is insured with a put option;
2) The presence of a stable trend. CFDs and futures can provide increased profits in the event of strong market movements.
Do you have any experience of investing in cryptocurrency? What strategies are you using? Share your opinion in the comments below! I would be happy to answer any questions or submit your project to my team at Astorts Group for evaluation.
Alessandro Rocco Pietrocola is an entrepreneur and investor based in London and operating mainly in Europe, Asia and Oceania with main focus on UK, Baltic Countries, Russia, China, Hong Kong, Malaysia, Singapore, Middle East and New Zealand as area of interest! At the moment is the CEO of Astorts Group. He is an UK FCA (Financial Conduct Authority) Approved Person and is has great experience as director of regulated companies. He uses to dedicate part of his life to inspire others and help them achieve the most out of their life. Since he was 20, he had successfully founded and managed several companies operating in the field of management consulting, wealth management and fintech. He loves travelling, he is a cigars lover, an amateur golfer and a dapper man.