Crypto Derivatives Explained: Trade Bitcoin Futures, Options

Derivatives trading allows traders to hedge the underlying crypto assets and mitigate risks through future predictions and betting of crypto market prices. With no expiration date, perpetual contracts are a type of derivative that resembles a futures contract. They are the best option for those who want to trade futures continuously because the contract never expires.

Traders who wish to profit from price movements in the cryptocurrency market without worrying about expiration dates sometimes employ perpetual contracts. Crypto derivatives facilitate market liquidity, impacting the ease with which traders can open or close positions. In a liquid market, there is typically less risk because there is always someone willing to take the other side of a position. Take perpetual contracts, for example, wherein shorts and longs pay the opposite position based on the funding rate. Leverage trading is the ability to control a large amount of an asset with a relatively small amount. For example, a trader may only need to put down 10% of the total value of a futures contract.

what are crypto derivatives

Futures and options are two common types of derivatives, and perpetual futures are a special type of futures contract unique to crypto markets. Crypto derivatives are financial instruments that derive value from an underlying crypto asset. They are contracts between two parties that allow traders to speculate on the price movements of cryptocurrencies without actually owning the underlying asset. As such, the trader makes a profit or loss depending on whether the asset price goes up or down. When trading crypto derivatives, it is important to manage your risk carefully. Crypto prices are volatile, and since crypto derivatives drive their value from underlying assets, they are subject to the same volatility.

Simply put, a derivative is any product or contract with a value determined by an underlying asset. In traditional financial markets, derivatives derive their value from assets such as stocks, bonds, interest rates, commodities, fiat currencies and cryptocurrencies, hence the name. It is important to note that there is no guaranteed way to make money trading derivatives in the crypto market, and it can be a highly risky endeavor. However, there are some ways traders minimize risks and maximize their chances of success.

Top 10 Crypto Derivative Exchanges

Additionally, traders often diversify their portfolios across different assets to avoid overexposure to any one position or asset. A long position is when a trader believes that the underlying asset’s price (e.g., Bitcoin) will increase in the future. A short position, on the other hand, is when a trader believes that the underlying asset’s crypto derivatives exchange price will decrease in the future. Crypto futures are a type of derivative contract that allows two parties to agree on the price of a cryptocurrency at a fixed date in the future. Upon expiration of the contract, the buyer is obligated to receive and purchase the asset, while the seller is obligated to deliver and sell the asset.

what are crypto derivatives

To start trading, a user would transfer assets from their Spot Wallet to Wallet [Pro] and accept the derivatives trading terms and conditions. Once the application is approved, Wallet [Pro] will be activated with derivatives services enabled. They are also leveraged instruments because the amount paid to hold the option is small relative to the total contract value. Crypto derivatives trading is a great option for both beginner crypto investors and seasoned ones.

How does a crypto derivatives contract work?

Derivatives also predict the price variation and future risks of a crypto asset. One of the hardest challenges of crypto trading is the volatility of the market. Derivatives allow crypto traders to hedge against investment risks that help to downsize the risks of the market. The leverage for Bitcoin contracts on the exchange is up to 100x, while altcoins have between 20x to 50x.

  • This means traders can hold a perpetual futures position for as long as they want, potentially profiting from long-term price movements in the underlying asset.
  • As such, the trader makes a profit or loss depending on whether the asset price goes up or down.
  • For example, a crypto derivatives exchange like Binance allows users to select leverage that goes up to as much as 125 times the initial margin.
  • By entering into this agreement, you reduce your risk of having to pay a higher monthly price throughout the year.
  • Forwards is a contract that can be customized to fit the needs of the trader.
  • In today’s financial and crypto markets, physical delivery of the asset does not always occur with futures contracts.

This payment is essentially coming from another trader that chose to short and lost money. The only fees you must consider are the aforementioned funding rate payments and any additional exchange fees. Derivatives in cryptocurrency can be traded on both centralized and decentralized exchange platforms. Cryptocurrency derivatives exchange can be used by exchange owners to reach out to additional investors. A crypto derivative trading platform is more flexible than spot margin trading and gives you access to markets that would otherwise be inaccessible to you. Traders often utilize derivatives to speculate on the prices of cryptocurrencies, with the main objective of profiting from the changes in the price of the underlying cryptocurrency.

For example, a crypto derivatives exchange like Binance allows users to select leverage that goes up to as much as 125 times the initial margin. If a lot of traders have long positions, with the price of perpetual contracts rising incrementally above the spot price, there would be no incentive for people to open short positions. The main difference between perpetual contracts vs. futures and options is that perpetual contracts do not have an expiry date.


Futures contracts allow you to trade, take advantage of market volatility, and capitalize on opportunities by going long or going short. Derivatives can protect a portfolio from unexpected risk owing to high volatility in terms of crypto-asset prices. Derivatives trading also enables leverage, allowing traders to control larger positions with a smaller amount of capital — hence magnifying the potential gains. Additionally, derivatives facilitate portfolio diversification, meaning traders can maximize their returns and manage risks more effectively. Trading derivatives across various assets can reduce individual market risks and achieve a more balanced portfolio.

For example, if the price of the perpetual contract exceeds the index price, traders who have taken a “long” position typically pay the funding rate to compensate for the price difference. Conversely, if the perpetual futures contract price is lower than the index price, traders with a “short” position pay the funding rate. In today’s financial and crypto markets, physical delivery of the asset does not always occur with futures contracts. Instead, the profit or loss arising from the trade is typically settled in cash and credited or debited to the trader’s account. For example, if too many traders have long positions and the price of BTC perpetual contracts is rising excessively above BTC’s spot price, people would have no incentive to open short positions.

Derivatives are used as a form of security against an underlying asset that has financial value (a fixed price). Derivatives were used as contracts between two parties who wanted to trade, buy or sell a product based on its future price. The value of the underlying asset served as a benchmark based upon which the future price was determined. Crypto derivatives tokens are unique types of cryptocurrencies that represent a position in a crypto derivative contract. These tokens are typically generated by decentralized finance (DeFi) platforms that offer crypto derivative services.

What Are Crypto Derivatives and How Do They Work?

The use of derivatives will ensure that traders who previously were at the mercy of price fluctuations will now be able to protect themselves from any risk that might stem from such occurrence. It’s a protocol that allows for trustless margin trading and derivatives on the Ethereum network. Users can go long or short on various cryptocurrencies with up to 10x leverage.

While traditional derivatives are based on assets such as stocks, commodities, or bonds, crypto derivatives base their value on digital assets. They enable participants to hedge against crypto asset price volatility or take advantage of the price movements of these assets without the need to own them directly. You should not construe any such information or other material as legal, tax, investment, financial, cybersecurity, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by to invest, buy, or sell any coins, tokens, or other crypto assets. Returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction. Any descriptions of products or features are merely for illustrative purposes and do not constitute an endorsement, invitation, or solicitation.

Since perpetual contracts don’t expire, their prices can start deviating significantly from bitcoin’s prices. A solution to this problem is to have one side of traders pay the opposing side. With the help of financial instruments called “crypto derivatives,” investors and traders can make predictions about the future value of cryptocurrencies like Bitcoin, Ethereum, and other altcoins. Due to the volatility and lack of regulation in the cryptocurrency markets, crypto derivatives offer a chance for possible profits but also carry a high risk of loss. The market for cryptocurrency derivatives is underdeveloped and unregulated, making it potentially more dangerous and volatile than traditional financial markets like stocks.

They provide leverage and the opportunity to profit from bullish and bearish market conditions, much like more conventional financial derivatives like options and futures. If the price is at $10,000, you can open a position of 10,000 contracts to trade the equivalent of 1 BTC. If you are going long, you can hold your position for as long as you want until the price has increased to a level that you are satisfied with. Once you choose to close our position, the exchange will take care of paying you the difference between your entry price and the current market price.

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