Topic: How Derivatives Work in Crytocurrency. (Read 196 times)

wow... the question that keeps coming to mind are in two folds. I have not traded derivative before; do we use the same trading platform for crypto trade and crypto derivative trading? Which of the two is more complex to gain mastery in? generally, derivatives as the name implies, they derive value from the base assets.

A friend of mine has shared with me once how he uses swapping in crypto holdings. He said he will observe the fluctuation of coins of various trading platforms to know if there are differences. He will move some funds from the lower value coin exchange to the one that has high coin value in order to make profit. But, the fee must be greater than the difference between the two exchange coin value. Does this expslain how possibly we can use swapping in crypto?

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wow... the question that keeps coming to mind are in two folds. I have not traded derivative before; do we use the same trading platform for crypto trade and crypto derivative trading? Which of the two is more complex to gain mastery in? generally, derivatives as the name implies, they derive value from the base assets.

[moderator's note: consecutive posts merged]

Not only for speculations, hedging is the main derivative use.

The "asset involved" is actually called "underlying asset".
Underlying assets also include interest rates, FX, bonds....


Who said that?
You can have both OTC and listed Options.
You can have listed CFD either.


Your opinion, not a fact.


No idea of what is this list.


That's for sure.

There is a difference in derivatives between investing and just hedging. In your example you want to hedge the currency risk involved in your investment. You already own the asset and just want to limit some of the risks involved. For this you don't need any complicated derivatives, just some futures. There is no explicit risk involved because the rates are fixed for all major countries in a 1, 3, 6 month and yearly setting.
More complex derivatives offer you a chance to invest into something with leverage. With options you can profit of a price increase without actually owning the underlying asset. Let's say you want to participate heavily in the rise of bitcoins but you don't have the funds to actually buy many bitcoins. The best way is to buy options. You limit your downside with a large upside potential.

Derivatives an agreement between two or more parties that is used for speculation. The price is determined or depends on the asset involved  shares or commodities Derivatives can be exchange-based futures and options or OTC CFDs.The first is traded through an organized exchange, but the rest is traded between two parties. Trading charts provide many benefits.
Grid trading
Chart
Chart design
Protection of funds
Price reduction
Forex Trading Strategies
Forex market
In the case of derivatives trading, besides these, there is more work to be done in binance but before that you have to learn about derivatives trading.

Yeah I forgot to include the futures part that is up to 125x on binance (it's a bit different from margin though as margin is like an active loan against collateral rather than a futures contract - for example you can't short in binance margin like you can in binance futures afaik).

But you can get even up to 150x on BTCUSDT pair.

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Derivates are just some coin/token/security which price is reliant on the price of other asses or more of them. It will be like new Facebooks (stable)coin Libra which price will be deducted from some fiat currencies.

Swap is indeed a famous form of derivatives. It is primarily used in case of interest bearing securities like bonds, debentures or most popularly in case of loans. Plain Vanilla Swap is the most common form of Swap and involves two parties wherein one party agrees to pay other party a fixed rate of return while other agrees to pay floating (changing) rate of return to the first. For example, Company X agrees to pay interest @ 12% p.a. on $10,000 after 4 months to Company Y. While Company Y agrees to pay interest @ LIBOR + 1% to Company X after same period.

Now both parties are speculating here. Suppose after 4 months, LIBOR stands out to be 17%. It means Company X will pay $400 (10,000*12%*4/12) and will receive $600 (10,000*18%*4/12). Hence, Company X stands out to be the winner and made the profit of $200 out of nothing while Company Y bore the loss of $200.

Unlike Futures and Options, Swap is mostly used for hedging purpose instead of speculation. It is a tool commonly used by Banks and financial institutions to fix their profits by swapping floating rate loans for fixed rate interests.

But since Cryptocurrencies like Bitcoins aren't interest bearing securities, it is not possible to apply the exact concept of 'Swap Derivatives' in Crypto Market. However, I have seen some application of swaps in cryptocurrencies. But these are mostly a rip-off of Options. For example, suppose Ada and Marie entered into Swap Deal of 0.10 Bitcoin worth $1000 for 4 months. Ada has to pay $50 to Marie after 4 months while Marie has to pay as per the spot rate after 4 months. Now suppose after 4 months, Bitcoin price stands to be at $12,000 which means 0.10 BTC now worth $1200. Hence, Marie will pay Ada $200 while Ada will pay Marie $50. So Ada made a profit of $150 while Marie suffered the loss of $150. Inversely, if the price dropped to $8000 after 4 months, Ada will have to pay Marie $50 while Marie doesn't have to pay anything to Ada. So Marie will make the profit of $50 while Ada will suffer the loss of $50.

In short, Swaps are not viable option in case of cryptocurrencies. So in crypto, we primarily stick to Futures and Options.

This is a great and an elaborate explanation. Initially, i thought derivatives are primarily used to hedge investment against loss. Since they are used as trading instruments, that means derivatives in crypto could have high potentiality for profitabaility than that in stock and forex trading due to the volatality nature of bitcoin and other coins.

can we called "swapping" another form of derivative in crypto?

Currently, we have Binance and a number of other big exchanges that support futures trading. It is also one of the derivative instruments and it helps us to make a lot of money and it also makes us lose a lot of money. You know, the crypto market is always very volatile and if you are not good at derivatives then we will be able to lose more money. so learn more before starting a derivative trade to insure your money.

In case you are wondering how to use a derivatives, I wrote a couple of guides that might help you on the basics:

Everything you wanted to know about BTC options but were afraid to ask!
Everything you wanted to know about BTC futures but were afraid to ask!

Derivatives are a very powerful tool, but to use them in your own advantage, you need to know how they work! Otherwise, you will be soon separated from your funds.

Derivative markets are already becoming popular in crypto niche. Since 2019, I have got several promotional deals of new Bitcoin Derivative Exchanges on Twitter and I even accepted couple of deals. One of which paid me healthy trading bonus alongside my promotion fees so I got good first hand experience in Bitcoin Derivatives.

Derivatives are primarily used for speculation in crypto world. I doubt if anyone uses these for hedging crypto deals at all. In crypto market, Futures and Options are two most popular derivatives. As I guess, you already have a sound knowledge on how both of these works and difference between the two so I will straight come to the point. In short, if you are in crypto trading world, don't try Futures. Prices of cryptocurrencies are very volatile. For example, if you are in long position with 100x leverage, just 1% fall in price will dilute your margin. Unlike stock market, as soon as margin is diluted in Crypto Market like on Bitmex, your position will be closed and your margin money will become your loss.

If you are new try studying crypto patterns and start with either low leverage (3-5x maximum) futures or with writing options (selling options). Don't start with high leverage futures or buying options. Else, you will lose your money pretty quickly.

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Derivatives in Crypto market are almost similar to Stock or Commodity Market. There isn't much difference. Just difference of volatility which is both bane and the boon. You can make unprecedented profits by just staking small margin money but at the same time you have higher probability of losing money due to volatility and manipulation (unregulated market).

I think a few companies like binance have only just started in the derivatives space so they may have quite a long way to go.

Bitmex is a bit more traditional so probably y won't see much of an improvement...

Wow..its great to know that there some derivatives innovations already in cryptocurrency. From the look of things, I believe great opportunity abounds in this niche.

I expect to see these derivative innovation in the coming years...

First I noticed were leveraged exchanges like bitmex and bybit which offer up to 100x leverage.

I've seen there are margin options up to 4x on binance too (so you can lend 4x more than your balance and releverage from there).

Bitmex and binance both offer btcup and btcdown contracts which apparently releverage as they go so they don't liquidate (I'm not entirely sure how they work so you might want to take a look at them yourself).

Beyond that there are standard exchanges in the forex and stocks realm offering more traditional versions for btc too...

I have come to believe that the financial industry has impressive instruments and trading options. I have also seen how entrepreneurs and investors have developed innovation over time to solve certain problems in the financial market.

Imagine the risk that an investor that has a stock worth 2000,000 units @ $60/unit with an initial exchange rate of $1EUR: $567 face when the exchange rate of dollar depreciate to 1EUR: $600. That will be a very big loss to such an investor.

This is the general problem that derivatives solve in the financial market. They help to hedge and secure funds against fluctuation risk in the market.

In my research about this impressive instrument, I found a useful resource on Investopedia (https://www.investopedia.com/terms/d/derivative.asp) that explains the various form of derivatives such as; futures, swap, options and forwards. They are all leverage-able financial instruments to investors and businesses.

Here is how I want this thread to go.
What are the various derivatives we have in cryptocurrency . How do they work that make them innovative in this disruptive space?