A Look into the Market of Bitcoin Derivatives

Over the last couple of years, the cryptocurrency market has transformed into a fully-fledged financial ecosystem, containing thousands of digital assets and several financial instruments. An investment option that’s quickly growing in popularity is cryptocurrency derivatives.

This article will offer readers a quick overview of bitcoin derivatives, including the main categories that users might want to invest in.

What are derivatives?

To kick things off, a derivative is universally described as a financial security that reflects a value which is derived from a specific asset – in our case, bitcoin. Thus, the derivative is a contact between at least two parties which agree to purchase or sell an asset at a specific price on a future date.

Generally, there are three main types of derivatives: swaps, futures, and options, all of which are available within the cryptocurrency ecosystem. As such, users can choose to invest via bitcoin perpetual swaps, bitcoin options, or bitcoin futures.

Types of bitcoin derivatives

With this in mind, bitcoin futures represent a derivatives contract where two parties oblige themselves to either purchase or sell bitcoin at a specific price, on an agreed-upon date. Investors have the option to settle futures via either cash or BTC, while being provided the ability to speculate the future price of the cryptocurrency.

Bitcoin swaps generally refer to the agreement between two parties, where one is obliged to pay a specific amount that’s calculated via the volatility of bitcoin, whereas the second party must pay a strike price, which is commonly-agreed upon when the initial contract is signed.

Last but not least, bitcoin options are described as a financial contract where a buyer is offered the opportunity (not the obligation) to purchase the coin at a predetermined date and price. Similarly, sellers are also given the option to sell their assets under the same conditions.

Most financial analysts can agree with the fact that derivatives trading offers protection against unexpected volatility, hedging opportunities, and considerable profits derived from the speculator nature of these financial instruments.

At this point in time, cryptocurrency derivatives are still in their early days, which explains why these trading options are only available for bitcoin and ethereum exclusively, with BTC’s derivatives being far more prevalent.

Bottom Line

Based on everything that has been highlighted, cryptocurrency derivatives represent highly-complex trading instruments that investors generally use to protect their portfolio, guard against volatility, while ensuring speculation-based profitability. Derivatives are well-regulated in most nations, and are also gaining popularity among small-scale investors.