The cryptocurrency ecosystem is teeming with a variety of financial products and services. Some of the more popular among these offerings are crypto derivatives. Much like the ecosystem which encompasses it, crypto derivative trading presents an almost inexhaustive range of opportunities. This blog post will explore the several leading types of crypto derivatives, from perpetual contracts to options trading, and the distinctions between them.
In finance, a derivative is an investment that derives value from an underlying asset (i.e., bitcoin). Permitting traders to wager upon the value of an underlying asset with the opportunity to harness leverage, crypto derivatives—such as bitcoin futures contracts—provide a valuable avenue for speculation.
Over the past few years, Bitfinex has embraced this burgeoning interest, developing its platform to incorporate a wide array of derivative products, which are discussed in detail below.
Futures market explained
The most prevalent derivative—is the crypto futures contract. During a bitcoin futures trade, two parties commit to buying or selling BTC on a specified date for a predetermined amount.
However, crypto futures contracts are more than merely a wager on an underlying asset; they also present a valuable hedging opportunity. For instance, traders with an existing spot position in BTC can mitigate price fluctuations by taking an opposing position within a bitcoin futures contract.
Unlike spot trading, crypto derivatives markets make use of leverage. Leverage enables traders to borrow capital in order to finance a contract. Leverage enables traders to borrow capital in order to finance a contract. Leverage is typically employed to fund a greater position without the need for a significant equity stake upfront.
Perpetual contracts (and how they differ from crypto futures)
Perpetual contracts operate exactly like a traditional crypto futures agreement—with one crucial differentiation: they don't expire.
Perpetual contracts are the best of both worlds, permitting the intuitiveness of spot market trading while preserving the advantages of the futures market, such as leverage, and risk hedging.
By allowing indefinite expiry, traders can hold a position as long as they're able to fund it. This enables a more convenient approach to futures trading, with funding made every 8 hours to ensure the position stays open.
What is options trading?