As Covid-19 continues to influence global growth forecasts, crypto trading is on the rise as many investors view cryptocurrencies as a formidable tool to fight inflation and hedge against uncertainty. It is also a way to invest in a profitable venture to diversify your portfolio.
With cryptocurrency trading growing in popularity, different financial products have been created to provide traders with diverse investment options than is available in traditional financial markets.
These new products make it possible to better manage risks thanks to hedging transactions. They also allow the possibility of using margin trading to potentially generate massive profits. All these are achieved with leveraged funds and no risk of owning the underlying asset.
This sort of market is called the derivatives market.
Derivatives are products used by two parties to agree on the price of an underlying asset over a specified period or future date. As you have probably guessed, the value of a derivative contract comes from the value of the underlying asset. In the derivatives market, there are a number of financial products that you can utilize to your advantage in the cryptocurrency market: futures, contracts, turbos, options, and CFDs.
Derivatives are financial products, and their price is based on the future price of an underlying asset, in our case, these assets are cryptocurrencies such as Bitcoin and altcoins. Derivatives are an ancient financial tool, and their use is now widespread in the financial cryptocurrency market.
Why use derivatives?
Derivatives are mainly used to hedge against risks linked to price fluctuations in the markets. They are also a widely used tool for speculating on the evolution of the price of the asset to which they are attached. Derivatives are thus a purchase or sale contract at a certain fixed price. In this sense, these products function as call or put options which may or may not be exercised at the appropriate time for the investor who wishes to realize a capital gain.
A concrete use case of these products is that of airlines, in fact, their margins are strongly related to the price of oil, to hedge against the risks of an increase in oil prices, companies use derivatives to set a fixed purchase price, as low as possible, this price remaining valid regardless of market fluctuations.
Majority of the world's largest companies use derivatives to reduce risk. For example, a futures contract promises the delivery of raw materials at an agreed price. In this way, the company is protected against rising prices. Companies also enter into contracts to protect themselves from changes in exchange rates and interest rates.
Derivatives make future cash flows more predictable. They allow companies to accurately forecast their results. This predictability increases stock prices. Companies then need less cash to cover emergencies. You can invest more in your business. Most of the derivatives trading is done by hedge funds and other investors to gain more leverage.
Many derivatives contracts are offset or liquidated by another derivative prior to maturity. Therefore, in practice, it is also the case that Bitcoin derivatives do not actually pay out or become due. Instead, they are settled or liquidated at the end of the term.
How to use derivatives in the cryptocurrency market?
Cryptocurrencies are fertile ground for the use of derivatives. Indeed the high volatility of prices, as illustrated by the movement of the price of Bitcoin, going from 19,800 dollars at the end of 2017 to 3,200 dollars in 2018, demonstrates the advantage of derivative products which make it possible to fix a price for an option of purchase and/or sale.
Bitcoin derivatives were introduced to the market at the end of 2017, at the time of the price explosion, there is undoubtedly a strong correlation between the two events. The companies that were first to implement these products in the United States are the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME). These financial centers have thus offered many investors the possibility of entering the cryptocurrency market.
Thanks to derivative products it is possible to speculate on the rise of the price, for example by putting a call option at 10,000 dollars on Bitcoin to sell it at 20,000 thereafter. The same goes for downward movement which follows an efficient process called “Shortage”. This process consists of borrowing cryptocurrency on the market and selling it immediately, then buying the cryptocurrencies at a much lower price to repay the lender, all while realizing a nice gain if the price has fallen sharply.
Thus, today it is possible to trade cryptocurrencies using these financial products; however, you must be aware of the risks involved in these practices due to the market's very high volatility! So be careful to understand what is behind these products to avoid beginner mistakes. The derivative trading technique is mainly used for speculation and is offered by top brokers such as Plus 500, Drixx, eToro, etc.
To invest Bitcoin derivatives at all, investors need access to a trading platform, for example, Drixx Crypto Derivatives Exchange that deals in future and options trading.
Drixx is a next level cryptocurrency derivatives exchange, offering its retail users the ability to trade on various instruments via a peer to peer matching engine. Users can sign up, deposit, and immediately trade on their deep liquidity and tight spread markets.
At Drixx, you’ll have access to a top of the line futures & options derivatives exchange for digital assets with up to 100X leverage on all your various instruments.
Besides the trading product, Drixx offers an interest account product where users can deposit stable coins such as USDC and USDT and earn interest every 24h while relying on Drixx’s secure cold storage infrastructure and risk management team.