Are you still trading solely in spot markets? Have you considered exploring the exciting world of crypto derivatives? With the explosive growth of cryptocurrencies in recent years, the demand for trading derivatives has been on the rise. Crypto derivatives trading allows traders to take positions on the future value of cryptocurrencies, rather than just buying or selling the underlying asset.
Crypto derivative trading offers a plethora of benefits over spot trading, including the ability to trade with leverage, the potential for higher returns, and the ability to hedge against price movements. Additionally, the crypto derivatives market operates 24/7, allowing traders to capitalise on market movements around the clock. In this blog post, we will delve deeper into the world of crypto derivatives trading and explore the advantages it offers over traditional spot trading.
What are crypto derivatives?
The term derivative is used to describe a contract that is based on the performance of an underlying asset. These assets might include equities, commodities, currencies, bonds, and so on. The essential operations of crypto derivatives are similar. People employ crypto derivatives around the expiration date or earlier while following an underlying asset. In general, derivatives have inherent value (this is the rate at which they are traded in the market). Traders and investors utilize crypto derivatives to hedge their profits or risks linked with a given asset. The market movements of these assets are determined by buyers' and sellers' assumptions about the future price of the underlying asset. Binance, OKEx, Huobi, and Bybit are the major cryptocurrency derivatives exchanges in the industry right now.
Crypto Derivative Trading
In crypto derivatives trading, the underlying asset can be any cryptocurrency token. Two parties that sign into a financial contract speculate on the price of Bitcoin at a later period. During the initial phase of the contract, the parties agree on a selling/buying price for the cryptocurrency on a specified day, independent of market pricing. As a consequence, investors may profit from changes in the underlying asset's price by acquiring the currency at a lower price and selling it at a higher price.
The Crypto Derivatives Market
As of January 2023, crypto derivatives continued to dominate the industry, accounting for over 70% of the whole crypto sector and valued at US$2.04 trillion today. Although far below the volume levels observed in May 2021, this is a 76.1% increase over December 2022.
Src: Report from Crypto.com
Types of Crypto Derivative Trading
Crypto derivatives trading refers to the buying and selling of financial instruments that are based on the value of cryptocurrencies.
There are several types of crypto derivatives trading:
Futures Contracts: Futures contracts are agreements to buy or sell an underlying asset at a specific price and date in the future. In the context of cryptocurrency, futures contracts are agreements to buy or sell a specific amount of cryptocurrency at a specific price on a specific date.
Options Contracts: Options contracts are agreements that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price and date in the future. In the context of cryptocurrency, options contracts are agreements to buy or sell a specific amount of cryptocurrency at a specific price on a specific date.
Perpetual Swaps: Perpetual swaps are a type of futures contract that does not have an expiration date. Instead, they are designed to track the underlying asset's price on an ongoing basis. In the context of cryptocurrency, perpetual swaps are agreements to buy or sell a specific amount of cryptocurrency at the current market price.
Swaps: Swaps are contracts between two parties to exchange cash flows at a later date based on a predetermined formula. These are OTC (over-the-counter) transactions that are comparable to forwards but are not traded on exchanges.
What role do derivatives have in the crypto economy?
For a number of reasons, crypto derivatives are a crucial part of the cryptocurrency economy. First off, using derivatives enables investors to diversify their portfolios and get exposure to a range of cryptocurrencies. Investors can use derivatives to develop sophisticated strategies such as pairing or arbitrage trading.
Secondly, derivatives can protect a portfolio against high price volatility and unanticipated dangers. Futures and options, for example, allow a trader to “short” an asset or gamble on its price falling. A long-term investor with a portfolio of crypto assets cannot safeguard it in downturn markets until there is a derivatives market.
The third reason derivatives are significant is that they facilitate price discovery, which is the process of identifying an asset's worth. A multitude of factors influences it, ranging from market liquidity to information flow.
Price discovery may become more effective, leading to smoother market changes, by enabling investors to trade long and short. With optimum price discovery, price reliability is increased since market participants are aware that all pertinent information has been included in the asset's current price.
Purpose of Crypto Derivatives
Using derivative transactions allows for financially planned activities that can help a trader make higher profits, preserve a portfolio or compensate for other assets within a portfolio and aid miners in risk hedging.
Hedgers
A derivatives trade is commonly used to hedge against volatility, down-trending markets, or any other price change that might otherwise affect a portfolio. If the price of ETHBUSD falls, a derivatives trade that shorts the cryptocurrency (expects it to fall in price in the short term) will be profitable. This is due to the fact that the transaction is based on speculation about an underlying asset rather than real asset performance.
Speculation
Derivatives are also used to make predictions about the price of cryptocurrencies in the future. For example, if you buy Bitcoin and the price rises, you will earn. If the value of Bitcoin decreases, your short position shows that you are generating a profit, even though the market is in bear mode. Futures contracts allow you to trade, profit from market volatility, and seize chances by going long or short.
Leverage is another factor that makes crypto derivatives more appealing. Because it allows you to obtain exposure to an underlying asset for a fraction of the cost. For example, a crypto derivatives market like Binance allows customers to choose leverage of up to 125 times the original margin.
Miners
Crypto derivatives can also be employed by individuals who operate directly in the business. Bitcoin miners, for example, may desire to join the derivatives market to preserve their mining operations' assets. As additional miners establish operations, and as time passes, the available hash rate and Bitcoin's mining difficulty will automatically adapt to accommodate everyone. This indicates that the value of mining will gradually diminish over time. Technical advancements in mining computers may potentially benefit a handful of miners while costing the bulk until they can catch up. A derivatives trade can safeguard the average trader as well as miners.
What is the cost of developing a crypto derivative platform?
The cost of developing a crypto derivatives trading platform can vary depending on several factors, including the platform's scope and features, the complexity of the technology stack used, and the development team's experience and rates.
As a rough estimate, developing a basic crypto derivative trading platform could cost anywhere from $50K to $200K, while a more complex platform with advanced features and functionality could cost upwards of $500K or more.
It is important to work with an experienced development team that can provide a detailed cost estimate and project plan based on your specific needs. Clarisco is a well-known Cryptocurrency Exchange Development company that offers exceptional Crypto Derivatives Exchange Development services. Our convincing technical specialists and quick development methods let you create a user-friendly and successful platform at a reasonable cost. We assist you in building your own business by establishing crypto derivative trading platforms and reducing time to market. Our great customer service and experienced assistance will assist you in gaining an audience, engaging new consumers, expanding the platform's reach, and generating leads. Build a unique exchange platform, launch your business with us, and design your route to success with our assistance.
