What are cryptocurrency derivatives transactions? Where do I trade cryptocurrency derivatives? A derivative is a contract or product whose value is determined by the underlying asset. Currency, exchange rate, commodity, stock and interest rate are all examples of derivative assets. The buyers and sellers of such contracts directly object to the prediction of future transaction prices. In order to earn profits, both parties bet on the future value of the underlying assets. Do you know what cryptocurrency derivatives trading is? Now let's get to know.

What are cryptocurrency derivatives transactions?

The assets in crypto derivative transactions can be any cryptocurrency and token. The two parties signing the financial contract speculate the price of cryptocurrency at a certain date in the future. In the first stage of the contract, both parties agree on the purchase and sale price of cryptocurrency on a specific date, regardless of the market price. Therefore, investors can profit from changes in the price of underlying assets by buying currencies at a lower price and selling them at a higher price.

How big is the derivatives market of cryptocurrency?

According to Tokeninsight's industry report on cryptocurrency derivatives exchanges, based on the data of 42 exchanges, the trading volume of cryptocurrency derivatives market in the third quarter of 2020 was 2.7 trillion dollars. This represents a 25.1% increase over the previous quarter and a 159.4% year-on-year increase over the third quarter of 2019, indicating a huge growth in encryption derivatives in the past few years.

This figure shows the change&total amount of cryptocurrency derivatives from Q3-2019Q3-2020Q3. It will be worth 1.041 billion dollars in 2019 and 2.7 billion dollars in the third quarter of 2020.

What are the most popular derivative types of cryptocurrencies?

According to the contract conditions, cryptocurrency derivatives can be of the following types:

Futures: A futures contract is a legal agreement between two parties to purchase or sell the underlying assets at a specified price and date in the future. The contract is directly executed in the regulated exchange.

Option: The traders with option contracts can choose, but have no obligation to buy or sell the underlying assets at the specified future date and price.

Perpetual contract: Unlike futures or options, a perpetual contract has no expiration date or settlement date. In some cases (such as the account holding a certain amount of cryptocurrency), traders can keep their positions indefinitely.

Swap: A swap is a contract between two parties to exchange cash flows on a later date according to a predetermined formula. They are OTC (over-the-counter) contracts, similar to forward contracts and not traded on exchanges.

What are the characteristics of derivatives trading?

Automatic position reduction (ADL): When the position cannot be liquidated at a price higher than the bankruptcy price and there is not enough insurance to cover the contract loss, the ADL system of your cryptocurrency exchange will automatically reduce the position to the opposite position liquidation of the designated trader.

Stop loss/stop gain: allow traders to specify the lower limit price and upper limit price of orders, and allow them to automatically exit the market when conditions are favorable.

Partial closing orders: allow traders to obtain partial profits through partial closing orders, while continuing to benefit from the growing market.

Insurance fund: even if their holdings are lower than the maintenance margin level, it will also help traders protect their funds from automatic deleveraging.

Where do I trade cryptocurrency derivatives?

Cryptocurrency derivatives can be traded on centralized and decentralized trading platforms. Exchange owners can use cryptocurrency derivatives exchanges to reach more investors. The cryptocurrency derivatives trading platform is more flexible than the spot margin trading, allowing you to enter the market that could not have been entered.

What are the benefits of using derivatives?

Low transaction costs: As derivative contracts are risk management tools, they help reduce market transaction costs. Therefore, compared with other securities such as spot trading, the transaction cost of derivatives trading is lower.

For risk management: the price of the underlying crypto coin/token is directly related to the value of the derivative contract. Therefore, derivatives are used to mitigate risks associated with fluctuating underlying asset prices. For example, Mr. A purchased a derivative contract whose value fluctuated in the opposite direction to his cryptocurrency/token. He will be able to offset the loss of the underlying crypto coins/tokens with the proceeds of derivatives.

Market efficiency: derivatives trading involves arbitrage, which is essential to ensure that the market finds balance and the price of the underlying asset is accurate.

Determining the price of the underlying asset: Derivative contracts are often used to determine the price of the underlying asset.

Risk may be transferred: Derivatives allow investors, companies and other parties to transfer risk to others.

What are the disadvantages of using derivatives?

High risk: Due to the rapid fluctuation of the value of the underlying cryptocurrency/token, the derivative contract is extremely unstable. As a result, traders risk losing large amounts of money.

Speculative: Derivative contracts are often used as speculative instruments. Due to the unpredictability of major risks and their value fluctuations, speculative investments sometimes lead to huge losses.

In general, the above content introduces in detail what is cryptocurrency derivatives trading and where to trade cryptocurrency derivatives. I believe you will understand it after reading it. In short, the assets in cryptocurrency derivatives trading can be any cryptocurrency and token, and cryptocurrency derivatives can be traded on centralized and decentralized trading platforms.