What to know about cryptocurrency derivatives
Cryptocurrency derivatives are financial instruments that obtain their value of the price of a digital currency, such as Bitcoin. They allow specular operators on possible cryptocurrency price movements without really having the underlying asset. In this article, we will break up what you need to know about cryptocurrency derivatives.
What is a cryptocurrency derivative?
A cryptocurrency derivative is an agreement between two parties that is based on the performance of a digital currency. For example, a purchase option is a type of derivative in which the holder has the right, but not the obligation, to buy a specific security before a certain date.
Types of cryptocurrency derivatives
There are several types of derivatives available for cryptocurrency trade:
- Options : As mentioned above, the options give the buyer the right to buy or sell a security at a specific price on the expiration date or before.
- Future contracts
: Future contracts are similar to options but have an expiration date and are resolved in cash or physical assets instead of values.
- Swaps : Exchanges involve exchange a financial instrument for another, often with a fixed rate of interest or currency conversion. In the context of cryptocurrencies, swaps can be used to protect against price fluctuations.
- Guaranteed contracts (CCDS) : CCDs are similar to futures contracts, but require guarantees (as assets) in addition to underlying security.
Why use cryptocurrency derivatives?
Cryptocurrency derivatives offer several benefits for merchants:
- Coverage
: Derivatives can be used to protect themselves against pricing volatility, which allows merchants to administer their exposure to market risks.
- Speculation : Derivatives provide an opportunity for speculative trade, since prices are not fixed and can be influenced by a variety of factors such as news, feelings and market conditions.
- Liquidity : cryptocurrency derivatives can offer high liquidity, which is essential for large -scale trade.
Risks associated with cryptocurrency derivatives
While cryptocurrency derived can provide an attractive way of exchanging cryptocurrencies, there are several risks to consider:
- Market volatility : cryptocurrencies are known for their volatility, and derivatives can amplify price movements.
- Liquidity risks : The lack of liquidity in some markets can lead to significant losses if you cannot sell your positions fast enough or at a favorable price.
- Risk of counterpart : Commercial derivatives involve the risk of counterpart, where a part (the buyer) can fail to comply with their obligations.
- Regulatory risks : Regulations can change rapidly, and cryptocurrency trade is often based on the lack of clear guidelines.
Best practices to use cryptocurrency derivatives
To minimize risks when using cryptocurrency derivatives:
- Diversify your portfolio : extend your investments in a variety of assets to reduce risk.
- EDUCATE yourself : Understand the mechanics of derivatives and how they work before trade.
- Use margin or leverage : consider using margin or leverage to amplify your potential gains, but keep in mind that this can also increase your losses.
- Market conditions monitor : Be attentive to trends and market news to make informed commercial decisions.
Conclusion
Cryptocurrency derivatives offer a unique opportunity for merchants to speculate on cryptocurrency price movements without having the underlying asset. While there are risks associated with these instruments, understanding their mechanics and best practices can help you navigate the market effectively.
