Cryptocurrency derivatives are nothing but a financial agreement
between two or more traders, deriving their value from an original asset, known
as a cryptocurrency. More particularly, a cryptocurrency derivative is a concord
to purchase or put a cryptocurrency up for sale at a determined cost and a specific
time in the future. However, these derivatives do not usually have direct or inherent
value by themselves. This means that their value is purely derived from the expected
future cost movements of the original cryptocurrency.
In the world of finance, there
are three general types of derivatives, whether they are bitcoin derivatives, Ether derivatives, or any other cryptocurrency
derivative. These major forms of derivatives include:
Futures: It is a
financial agreement where a buyer has a compulsion for a purchaser to buy a
cryptocurrency or a seller to sell his cryptocurrency at a flat price and a
preset future cost.
Swaps: Swaps are an
arrangement between two parties to exchange a sequence of money flows in the
future, more often than not derived from interest-bearing products, such as
bonds, loans, or notes as the original asset. The most general form of a swap
is the interest swaps. This type of swap will usually involve the exchange of a
future flow of permanent interest rate payments for a floating rate payments stream
between two dissimilar counter-parties.
Options: An option is a financial
agreement where a purchaser has the right to buy a cryptocurrency or a seller
to sell a cryptocurrency at a preset price by a particular timeline.
Currently, there are only some cryptocurrency
derivatives available for the public because of their infancy market. Among
them, Bitcoin derivatives, Bitcoin
options, and Bitcoin futures are the most common derivatives. This is because Bitcoin controls more than 50%
of the whole cryptocurrency market capitalization, making it the major as well
as the most frequently traded cryptocurrency in the market.
Cryptocurrency derivatives are highly intricate financial products,
which are used by technical or advanced investors. There are two major reasons
for using these derivatives, which include:
1. They will offer the necessary
safety from volatility
The primary reason for the subsistence
of derivatives is for people and businesses to mitigate their risk exposure and
safeguard themselves from any price fluctuations of the underlying cryptocurrency.
2. Potential losses can be
avoided
If you are a Bitcoin investor,
you will be capable of using Bitcoin derivatives to protect your investment portfolio, which is known as hedging. It usually involves
taking steps to counterbalance potential losses. These derivatives will serve
as an essential risk management tool for investors and institutions. The idea
of hedging is like owning an insurance policy.
Traders, like you, will often use
Cryptocurrency derivatives to
speculate on the prices of your cryptocurrency. This is done with the major goal
of yielding from the changes in the cost of the underlying cryptocurrency. For example,
you may try to yield from an expected fall in the general prices of your cryptocurrency
by shorting it. Shorting is also known as short selling, which refers to the
betting act against the cost of a security. Speculation is habitually
considered negatively for the reason that it adds a higher level of instability
to the overall market.
