Decentralized finance (DeFi) and Digital assets have changed trading and finance forever. DeFi exchange platforms have introduced many options and advanced alternatives to promote the trading of cryptocurrencies such as margin trading, asset tokenization, creating stablecoins, and Cryptocurrency derivatives trading.It is rapidly surging in popularity. The concept of derivatives is nothing new. It has been used widely in traditional finance for a long time. But what exactly is Cryptocurrency derivatives trading? What are the different types of derivatives trading? What are the advantages of this concept? Let’s have a look.
What is Cryptocurrency Derivatives Trading?
Derivatives are contracts that signify an agreement between two parties to trade an asset for a predetermined price on a fixed date in the future, between two parties. In cryptocurrency derivatives trading, a contract is agreed between two parties predicting a price for cryptocurrencies on a particular date in the future. And on that date, the seller has to trade the cryptocurrencies to the buyer for the agreed-upon price in the contract, irrespective of the market price.
For example, a party agrees on a contract with a second party to purchase 10 bitcoins for 60,000 per bitcoin, in a year from today. So a year from today, the first party has to purchase the asset for the same amount even if the price has dipped or doubled. Similarly, the second party has to sell the asset for the agreed-upon amount even if the price has increased or diminished.
Derivatives trading is generally used to minimize the risk involved in cryptocurrency trading rather than gaining profit. This can be hugely significant considering the volatile nature of cryptocurrencies. This kind of tradings can be conducted through centralized or decentralized cryptocurrency exchanges or customer to customer.
Types of Cryptocurrency Derivatives Trading
There are different ways through which this trading can be conducted. Let’s have a look at each of them.
A swap is an arrangement to exchange cash flow between two parties. The most popular kind of swap is the interest rate swap. It is the swapping of fixed interest rate payments in exchange for a stream of floating interest rate payments or vice-versa.
In futures, a contract is agreed between two parties predicting a price for cryptocurrencies on a particular date in the future. And on that date, the seller has to trade the cryptocurrencies to the buyer for the agreed-upon price in the contract, irrespective of the market price. To make it less risky and more reliable, futures are always traded on exchanges.
Forwards are similar to futures, with only one difference. Forwards are traded directly between customers. These are considered riskier than futures.
Options are also similar to futures. A contract is agreed between two parties predicting a price for cryptocurrencies on a particular date in the future. But it is not mandatory for the buyer to purchase it.
Benefits of Cryptocurrency Derivatives Trading
1. Risk Mitigation against volatile Cryptocurrencies
The primary purpose for traders to opt for derivatives trading is to minimize the risk elements associated with the unpredictable nature of cryptocurrencies. As we know, cryptocurrencies are highly volatile, frequently experiencing severe fluctuations in their prices. So, to decrease the risks with the frequently varying market prices, traders make use of this derivatives trading.
Traders and investors use derivatives trading to decrease the prospect of bearing potential losses. An investor can make use of the Put option in derivatives trading to compensate for the potential losses occurring due to unpredicted circumstances in the future. Thus, Derivatives trading is highly useful for hedging risks.
3. Cryptocurrency Price Speculation
Betting and predicting the prices of cryptocurrencies is also an advantage of derivatives trading. Traders use derivatives to speculate on the future prices of cryptocurrencies to gain the benefits of possible price fluctuations.
Develop your own Cryptocurrency Exchange Website with Cryptosoftwares
Develop your Cryptocurrency Derivatives Trading Platform
Cryptocurrency Derivatives Trading is the perfect risk management practice. Traders and exchange platforms alike have realized the benefits of this derivatives trading. Develop your own platform for derivative trading with Cryptosoftwares. This Derivatives Trading platform will enable the sale, bidding, and purchase of securities, contracts, and options based on the current underlying value of cryptocurrencies.
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