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The cryptocurrency market has gained significant acceptance and has the potential to reach newer heights. There are over 2,500 coins or tokens in the market, most of them have built a market across them. The cryptocurrency market is expanding and has recently witnessed the introduction of crypto derivatives, the most common being Bitcoin futures.
With the burgeoning popularity of crypto derivatives, the demand for crypto derivatives exchange development is also increasing.
Let’s first comprehend derivatives and then we will move forward to crypto derivatives.
Derivatives are a popular instrument in the traditional exchange market, where professional traders and investors participate and hedge their risk on the price changes of the underlying asset. In simpler terms, derivatives are an instrument whose value is derived from an underlying asset or a group of assets. The underlying asset could be any stock, bond, commodity, currency (cryptocurrencies) or even benchmark indices. The most common types of derivatives contracts are futures, forwards, options or swaps.
For crypto derivatives exchange, the price of the cryptocurrencies is regularly tracked and it acts as a decision-making tool for speculators who wish to trade on price movements.
Bitcoin futures trading were launched by the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) in December 2017 when the crypto hit the bull run. The derivative contract allows investors to hedge their positions and to reduce their risk factor. By entering into the future contract, traders can mitigate their risk by signing a contract with the seller which settles down to a price of the underlying cryptocurrency.
Futures: Futures is a contract between two parties to buy and sell a specified asset on a specified date with the standardized quantity of price agreed upon. E.g. Bitcoin Futures.
Forwards: Forward contracts are the agreement between the two parties to buy and sell crypto assets at a specified date and time. The forwards are mainly used by hedgers who wish to reduce the risk of volatility in the prices of cryptocurrency. E.g. Bitcoin Forwards.
Options: Option is a contract where a buyer has the right to choose whether to perform an agreement on a specified date to buy or sell an underlying security or not. The seller of the contract has the obligation to perform the transaction if the buyer will exercise his option. E.g. Bitcoin/Ethereum Options
Swaps: Swap is a contract wherein two parties exchange a series of cash flow in the future. The most common types are interest rate swaps. E.g. Bitcoin Perpetual Swap.
Leverage Value: Leverage is the amount taken from an exchange or brokers as a loan amount for investor’s trading account. Funds are borrowed through placement of margin trading. Crypto derivative contracts can be leveraged with up to 100 times value, providing an opportunity for professional traders on the market to get exposed to price risks. Through this, traders seek higher returns as compared to the spot market.
Hedging: The entry of institutional investors and professional traders in the crypto market signifies the arrival of the hedging tool as their strategy. Hedging is against the investment risk wherein market offsets the risk of any adverse price movements. The value of the derivatives is linked to the value of the underlying asset.
Volatility: Derivatives contract saves the investors or traders from the fluctuations in the price of the underlying security. It reduces the risk exposure and protects an individual from market uncertainties. In this, you specify the period and future price of the contract and save yourself from paying a higher price throughout a year.
Speculation: Derivatives allow the traders and speculators to speculate on the price of the cryptocurrency. In this, a trader can benefit from the bull market and even from the bear market. If a trader speculates a decrease in the price of the cryptocurrency in the future, then he can enter into short selling and an attempt can be made to generate profits. But often speculation is viewed as to increase the volatility in the market.
Crypto derivatives are the future of the financial market. The CME Group recorded the volume of Bitcoin Futures to be over a billion US dollars in May 2019. Similar trends are being viewed for various other exchanges.
Crypto derivatives are continuously gaining popularity in the crypto market. Industry players are capitalizing on the derivatives opportunity by building their derivatives exchange platforms. Considering these trends, it would not be wrong to say that crypto derivatives are here to stay and crypto derivatives exchange development is a perfect solution to benefit from the flourishing derivatives market.
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