What You Need To Know About Crypto Derivatives?

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In addition to the usual asset trading, the crypto market has the opportunity to use various financial instruments, writes RBC Crypto. One o...

In addition to the usual asset trading, the crypto market has the opportunity to use various financial instruments, writes RBC Crypto. 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 are crypto derivatives?

  • Futures are 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;

  • Forwards are essentially the same as futures, however, the 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;

  • Options are 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;

  • 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 - indicate the conditions for the sale or purchase of the underlying asset in the future. Swaps are considered a more complex option for the future. Example: buying any product from a supplier and concluding an agreement on the supply of the same product to the end consumer in the future;

  • CFD  (contract for difference) - a contract 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 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 completely losing funds but also going into a deep minus, warned Nikita Soshnikov, director of the cryptocurrency exchange service Alfacash. He advised beginners to be extra careful with all derivatives.

“We must constantly remember that derivatives are targeted at active traders and speculators who constantly conclude deals. Due to low commissions and built-in leverage, crypto derivatives are especially popular among speculators, ”the expert noted.

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, Soshnikov added.

It is better for beginners to get experience in trading, master the basic concepts and learn to feel the signals for market movement, advised the head of the analytical department of AMarkets Artem Deev. In his opinion, after that, you need to develop your own strategy, taking into account the risks in a crisis and high volatility of the economy, and only then start working with crypto derivatives.

How to use instruments in trading

Leading analyst at 8848 Invest Viktor Pershikov gave specific market situations in which crypto derivatives can be used:

  • Risk of falling quotes.  Futures can be used to sell an asset and make money on falling prices, and options can ensure an investor against the risk of a decline in quotes. For example, for mining farms that predict the production of a 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;

  • The presence of a stable trend. CFDs and futures can provide increased profits in the event of strong market movements. 

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