Derivatives are financial contracts between two or more parties that get their value from the underlying assets, in this case, cryptocurrency. To be more precise, this is a buy and sell agreement of cryptocurrency at a predetermined price and time in the future. Derivatives themselves have no direct value. They are based entirely on the estimated future value of the selected assets. In general, there are 3 types of derivative products: Swaps, Futures, and Options.
Nowadays, cryptocurrency is still relatively new in adapting the derivatives market, so there are only a few choices in the market. The most popular ones are Bitcoin futures and options, because Bitcoin controls more than 50% of the cryptocurrency market, making it the largest and most traded coin.
Why Derivative Trading?
Although derivative trading is quite complex and often only played by professional or technical investors. There are several reasons why derivatives are better.
First, with derivatives, everyone can reduce risk and protect themselves from fluctuations in the price of the assets they choose. In addition to being protected from price volatility with derivatives, you can determine the amount you will sell in your plans to protect yourself from excessive fluctuations.
Second, Hedging, or the ability to protect our investment by offsetting potential losses. many say this is like having an insurance policy for our investment portfolio. With the ability to hedge, one can still benefit whether in a bear or bull market condition.
Third, Speculation. Many traders use derivatives to speculate cryptocurrency prices. The goal, of course, is to benefit from the price movements of the assets they choose. For example, a trader can make a profit by buying a derivative contract and anticipating price reductions on assets chosen by “Shorting”. Shorting is basically betting on the price of a security. Speculation is considered negative because it causes a high degree of volatility in a market.
In traditional markets, the way to get profit is by buying coins at low prices and then selling them at high prices later. However, this is only possible if done in a bull market or the trend is going up. Shorting no the other hand makes it possible to get profit when the bear market or trend is down.
Today, there are only a few cryptocurrency exchanges where you can trade derivatives. Some of them are, Bitmex, Binance, OKEX, and Tokenomy. Derivative trading allows you to benefit in every situation (bear or bull market). However, derivatives have a high level of complexity so that it is generally done by Professional traders or Technical traders who already have experience.
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Originally published at https://honestmining.com on May 20, 2020.