25 July 2022
2 min read
A contract or product is a derivative if its value is dependent on a base asset. It is similar to traditional trading, which includes a buyer and a seller. In derivative trading, Instead of exchanging the base asset as typical trading would suggest, the parties to this deal speculate on its price volatility, after which they agree to buy or sell it.
Any cryptocurrency token can be the base asset in crypto derivatives trading. A financial contract between two parties involves speculation on the price of the cryptocurrency in the future, based on which they mutually agree whether to buy or sell.
As an illustration, consider a coin with the name ABC. Now, one individual thinks the price will decrease while the other thinks it will increase. You and the other speculator might write a contract speculating that if the price changes in any way, one of you will have to make up the difference in price for the other.
Why are people exploring Derivative Crypto Trading?
Cryptocurrency brings a lot of uncertainty and volatility with it when it comes to trading. As a result, a lot of traders hesitate in obtaining and maintaining assets because they fear the mismanagement of their portfolios, heading toward losses. But derivative trading reduces the risk associated with cryptocurrencies' volatility. They work to lessen an investor's exposure to risk while also assisting them in safeguarding their asset portfolios against losses.
The derivative trading market has taken off because, with the help of cryptocurrency derivatives, market participants can avoid managing wallets and other complex market infrastructure by not holding the actual asset. And for new buy-side participants, dealing with regulated counterparties is a safer approach to gaining access to the asset class.
Some types of Crypto Derivate Trading?
Futures: A futures contract is a binding contract between two parties that commits them to buy or sell an underlying asset at a given price and time in the near future. A licensed exchange is required to carry out a direct execution of such a contract.
Options: This type of trading gives the trader an option but does not put him/her under the obligation to buy or sell the underlying asset at a specified price and future date.
Perpetual Contracts: Contracts with no expiration or settlement date are known as perpetual contracts. A trader may be able to hold onto a position indefinitely under certain conditions (such as when the account contains a specific amount of cryptocurrency, etc.).
If you’re interested in the concept of derivative crypto trading, it would be advisable to read up on the market analysis before diving into it. Since anything related to crypto trading comes with a lot of uncertainty, thorough research is mandatory.