Due to their numerous opportunities, crypto derivatives have gained popularity in recent years among individual and institutional traders.
It has a lot of potential benefits, as well as some risks.
What Are Crypto Derivatives?
Derivatives are contracts whose values depend on the value of other underlying assets.
Thus, crypto derivatives get their values from an underlying crypto asset.
They are traded online on many crypto exchanges and also over the counter (OTC).
The parties can agree to buy or sell crypto in one month, regardless of the actual price.
Perpetual Futures
A perpetual futures contractis simply a futures contract without an expiration date.
This means that investors can hold their positions for as long as they desire.
Options contracts are classified into two types: call options and put options.
They are also similar to futures, with the difference being that futures are traded on OTC exchanges.
Forward contracts are prone to more risks since there is a lack of decentralization.
If the price starts to drop, you will begin to lose your profit.
Spot traders find periods of prolonged bear markets distressing because making a profit at such a time is difficult.
The price of derivatives is set to be very close to that of the spot market.
The market allows you to profit regardless of whether the price increases or decreases.
Derivatives markets could be effective markets during the crypto winter.
However, it requires more time to master how to trade derivatives.
More so, the risks involved in trading derivatives are usually higher than those in the spot market.
This edge also makes it easier for those with little trading capital to trade derivatives.
Thus, derivatives serve as a speculative market to mitigate risk, especially during high price fluctuations.
The derivatives market allows you to get into the crypto market without holding any crypto.
Disadvantages of Trading Crypto Derivatives
Derivatives use speculative tools, and price movement can be very unpredictable.
Thus, making irrational decisions can result in significant losses.
Derivatives traders are susceptible to short-term crypto market price manipulation.
It becomes worse when the positions are leveraged.
Derivatives traded over the counter, like forwards, have a higher chance of counterparty risk.
One of the parties involved could default on the agreement since the contracts are usually privately negotiated and unregulated.
Is Crypto Derivatives Trading Suitable for You?
Below are some questions to answer in determining if crypto derivatives trading is a good option for you.
Are You Comfortable With the Risk Involved?
The derivatives market is suitable for traders with a high-risk appetite.
Traders with a low-risk threshold may not be comfortable trading derivatives.
Do You Understand How the Market Works?
You should understand the factors that cause price changes in the crypto market.
Every financial market has unique factors that cause changes in price and affect movements.
Similarly, every market also has a unique pattern of movement, popularly known as price action.
Understanding how they work helps you to speculate easily on the price direction.
Do You Know How to Carry Out Trade Analysis?
Trading in the derivatives market is a lot more complex than in the spot market.
Manage Risk
Derivatives trading is suitable for both new and experienced traders.
you could choose any of the available options based on which you prefer and understand best.
