Binancebot.io Presents: What Are Crypto Derivatives?

The market for cryptocurrency may be split into spot trading and derivative trading. Today we will focus on what are derivatives of cryptography and how they could be used.

What are derivatives?

A derivative is described as a business contract between two or more parties that wish in the future to buy or sell an underlying asset at a set price.

The contract value will be given by the variations in the price of the underlying asset.

Derivative contracts can have anything from currencies, securities, commodities, shares, stocks, market indices, and interest rates as their underlying assets.

Derivatives can be traded in two ways: via Customer-to-Customer (C2C) or exchanges. Nevertheless, the latter approach is distinct on controlling and trading.

Financial derivatives have begun to gain increasing popularity in the crypto industry, particularly when it comes to Bitcoin futures contracts. Read here more info about derivatives.

Types of crypto derivatives

Cryptocurrencies is a very speculative market, with quick daily price fluctuations. Traders of course are looking to capitalize on such fluctuations in prices. Traders can speculate on the future price of bitcoin or other altcoins by using crypto-derivatives and make a profit if their forecasts turn out to be correct.

There are different types of crypto-derivatives that can be traded on traditional exchanges or on regulated crypto-exchanges.

Futures contracts

A futures contract is a business contract between two or even more parties in which an intangible asset, in our case crypto is sold or purchased at a fixed date in the future but the price is set in the present.

A futures contract helps investors to manage bets and mitigate the risk of volatile market volatility, which is quite fitting in view of the cryptocurrencies uncertainty. Therefore, traders are able to mitigate the risk by trading Bitcoin and altcoin futures by signing a contract which directly settles the price of an underlying crypto.

CFD (Contracts for Difference)

A CFD is a contract premised on a fundamental crypto that contracts to pay the owner the difference between the price of the underlying asset at the contract beginning and the price at the contract end. When you open a CFD, you speculate on whether the crypto price is going to go up or down. If the contract is liquidated, and your future price speculation is incorrect, higher losses will have to be sustained as this is a leveraged product.

ETF (exchange-traded funds)

An ETF is a derivative contract that tracks price evolution of a single crypto or collection of cryptos. Traders can optimize their investments with ETFs without actively buying and owning the assets the ETF tracks.

Conclusion

Crypto derivatives can be a very lucrative way to gain exposure to the digital asset market, but it is best for new traders to get a strong first grip on trading and investing before joining any of these financial contracts.

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