Cryptocurrency-Derivatives: More Than Just A Trend
Derivatives trading has increasingly influenced the market for cryptocurrencies in the recent years. A large part of the trading volume for cryptocurrencies is settled via derivatives. Various studies by Alameda and Bitwise Capital have concluded that the share of derivatives trading accounts for 60-90% of the total volume.
Derivatives can take different forms and have different specifications. In this article we will explain to you what cryptocurrency-derivatives are, what different forms there are and what advantages they offer.
What Are Derivatives?
A derivative is a financial contract between two or more parties that is based on the future price of an underlying asset.
Over the centuries, derivatives have become one of the most popular financial instruments. Today, a derivative is understood as a security that derives its value from an underlying or a benchmark. The contract may be entered into between two or more parties who wish to buy or sell a particular asset in the future at a particular price. The value of the contract is therefore determined by changes or fluctuations in the price from which it derives its value.
Typically, the underlying assets used in derivatives are currencies (or cryptocurrencies), commodities, bonds, equities, market indices and interest rates. Derivatives can be traded either on the exchange or from client to client (C2C), which differs significantly in terms of regulation and type of trading. However, professional traders usually use both methods.
What is The Purpose of Derivatives?
Derivatives are used in many areas, but above all for hedging purposes when investors want to protect themselves against price fluctuations. In this case, signing a contract to purchase an asset at a fixed price would help mitigate the risks involved.
Another way to take advantage of derivatives trading is speculation when traders try to predict how the price of the asset could change over time.
There are many ways in which derivatives can be used in real life. For example, the large US holding company Berkshire Hathaway began selling put options on four stock indices, including S&P 500 and FTSE 100, before the 2008 financial crisis – and made a fortune.
What Are Put Options?
A put option is a form of derivative that gives the owner the right, but not the obligation, to sell an underlying asset to the seller of the put at a certain price until a certain point in time.
Derivatives with crypto-assets as underlying are used for speculation in most cases.
The second largest target group, apart from speculators, are institutional investors who wish to invest in cryptocurrencies, but not directly. For them, Bitcoin futures such as the recently launched Bakkt Bitcoin futures are extremely interesting. You can invest in Bitcoin, but trade on a regulated exchange.
What Forms of Crypto-Derivatives Are There?
CFDs: CFD is an acronym and stands for “Contract for Difference”. When trading CFDs, you do not buy or sell the underlying asset (e.g. a physical stock, a currency pair or a commodity). You buy or sell a number of units of a contract that is entered into with a broker/stock exchange. Some CFD providers, such as eToro, have been involved in the cryptocurrency market for some time and offer contracts for it.
ETFs: An Exchange Traded Fund is similar to a CFD and represents one or more assets. Here, too, the underlying asset is not purchased, but a bet is placed on the price formed by a benchmark. A Bitcoin ETF does not yet exist, but some providers are trying to offer a corresponding product. The first crypto ETNs are already available, but they are not as secure as crypto ETFs. ETF assets are always independent of the issuer. With an ETN this is not the case and there is an issuer risk.
Futures: A financial contract where a buyer has an obligation for a buyer to buy an asset or a seller to sell an asset (e.g. commodities) at a fixed price and a predetermined future price. A special form of futures, which are very popular in cryptocurrencies, are perpetual contracts. These are futures without an expiration date and can be closed at any time.
Options: A financial contract where a buyer has the right (not the obligation) to buy an asset or a seller has the right to sell an asset at a predetermined price within a specified period of time. There are put or call options, ergo one wants to sell or buy the underlying value.
The Most Popular Crypto Derivatives
The most popular cryptocurrency derivatives to date are Bitcoin futures and options, as Bitcoin accounts for over 50% of the total market capitalisation for cryptocurrencies, making it the largest and most traded cryptocurrency:
However, other crypto currencies are also moving more and more into the focus of derivatives exchanges. Coingecko.com lists a large number of Bitcoin, Ethereum and altcoin derivatives:
- 20 Bitcoin Perpetual Contracts
- 33 Bitcoin Futures
- 18 Ethereum Perpetual Contracts
- 17 Ethereum Futures
- 90 Other Perpetual Contracts (Altcoins)
What Providers Are There For Trading Crypto-Derivatives?
BitMex was founded in 2014 by HDR Global Trading Limited (founded by former bankers Arthur Hayes, Samuel Reed and Ben Delo) and is a global crypto derivatives trading platform based in the Seychelles.
It is one of the largest Bitcoin trading platforms currently in operation, with a daily trading volume of over 35,000 BTC and over 540,000 accesses per month.
Unlike many other trading exchanges, BitMEX only accepts deposits in Bitcoin, which can then be used to purchase a variety of other crypto currencies. BitMEX specializes in margin trading with leverage.
In addition to Bitcoin, there are a number of other contracts that can be traded with leverage of up to 1:100.
Bybit is a new crypto derivatives exchange and gives you the opportunity to trade Bitcoin, Ethereum, Ripple and EOS with a leverage of up to 1:100. In a very short time, they were able to build up a customer base of 100,000 traders and a steadily increasing volume.
Bybit is based in Singapore and operates under Bybit Fintech Limited, registered in the British Virgin Islands. The team consists of experts from the blockchain and financial sectors. The R&D team has experts from BAT and the risk management team consists of Morgan Stanley alumni.
They have a strong focus on security and apply the hierarchically deterministic cold wallet system which stores all assets. All payouts are processed manually three times a day. In addition, the website is fully SSL-encrypted. All sent passwords and address information are secure.
Deribit was founded in 2016 and is an online platform specializing in futures and options on Bitcoin. In fact, the name “Deribit” derives from the words “Deri for Derivatives” and “Bit for Bitcoin”.
Deribit was founded by its CEO John Jansen and is based in the Netherlands. The office is located at Stationsstraat 2b, 3851 Ermelo, Netherlands. The platform’s product offerings are open to dealers from all over the world. They offer a leverage of up to 1:20.