You've probably heard the term 'derivative' being used often in a crypto space - but what exactly is it? Well, in simple terms, a crypto derivative is basically no different from a derivative used in traditional finance.
A derivative is a financial instrument that is tradeable and gets its value from an underlying asset. This allows traders to gain exposure to the asset's price movement despite not owning it. Two parties agree to a contract that states the rules for the sale of the asset, which will include the contract's price, quantity, as well as period of validity.
What Are The Types of Crypto Derivatives?
There are 3 types of crypto derivatives: perpetual swaps, options, and futures.
Perpetual Swaps
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Financial derivative that lets the trader guess the price movement of crypto assets with leverage.
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Perpetual swaps do not have a due date.
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Uses a mechanism where the contract's price will match the asset.
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The difference between the contract trading price and the asset price is what will determine the perpetual swap funding rate.
Options
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Derivative contracts where the trader receives the right, but is not obliged to, purchase or sell an asset for a certain price at a predetermined time in the future.
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The option buyer has the right, but the option seller has the need to complete their part of the concert if the buyer decides to hold it instead.
Futures
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Derivative contracts where traders are obliged to buy or sell the asset they have at a predetermined date for a certain price in the future.
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Most popular crypto derivative, very useful for novice traders.
What are the Advantages of Crypto Derivatives?
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Leverage to trade with bigger assets
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Reduce market risk by hedging assets
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Experiment with complex trading strategies
What are the Disadvantages of Crypto Derivatives?
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Leverage used can increase risk and losses
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Non-regulatory and has general legal risks compared to traditional financial instruments.
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Bigger chance of credit risk
How To Trade Crypto Derivatives
You can learn how to trade crypto derivatives right here on Toobit Academy! Check out our Toobit Guide for step-by-step tutorials on How To Trade Crypto.
For more information, please check out our analysis articles available at Toobit Academy.
