Cryptocurrency derivatives: how they work and what is needed?

Financial derivatives are often discussed when talking about kriptonyte: especially in relation to futures contracts on Bitcoin or altcoins. It is worth noting that the derivative is one of the oldest forms of financial contracts existing on the market. The history of such transactions can be traced back to ancient times. In the middle ages, derivatives were used to facilitate transactions among merchants who traded throughout Europe and participated in the periodical fairs of early varieties of medieval markets.

In short: a derivative is a financial contract between two or more parties based on future price of the underlying asset.

Over the centuries, the derivatives evolved, becoming one of the most popular financial instruments. Today under understand derivative securities whose value is based on an underlying asset or benchmark. The contract can be concluded between two or more parties wishing to buy or sell an asset at a certain price in the future. Thus the contract price will be determined by changes or fluctuations in the price of the underlying asset.

Underlying assets of derivatives can be currency, including cryptocurrencies, inventory, bonds, stocks, market indices and interest rates. Derivatives can be traded on exchanges or directly between end-users. These methods differ as the process itself, and in terms of regulation. However, active traders usually use both techniques.

The contents

Why trader use derivatives?

Derivatives generally used to hedge (reduce) risks or for speculation on the price of the underlying asset in case of its change.

Source: 2Биткоина

Derivatives are used in many areas, but primarily in order to hedge, when investors want to protect themselves from price fluctuations. In this case, the signing of a contract to purchase an asset at a fixed price helps to mitigate the associated risks. Another way to benefit from derivatives trading is speculation, that is, when traders are trying to predict how it may change over time the price of the asset. For this reason, a major American investor Warren buffet once called derivatives “financial weapons of mass destruction”, sharing the widespread belief that they are responsible for the global financial crisis of 2007-2008.

There are different ways of applying derivatives in real life. For example, before the crisis mentioned large American holding company Berkshire Hathaway started to sell put options on four stock indexes, including the S&P500 and FTSE 100.

A put option is a type of derivative that gives the holder the right but not the obligation to sell the underlying asset to the option seller at a specified price before a certain date.

Source: The National

In this case, Berkshire Hathaway offered investors the chance to buy the opportunity at a certain date to sell their shares at a specified price. Upon the occurrence of the relevant date, they could earn selling the shares, the price of which has declined markedly. However, if the price during this period will rise, the company will receive the option premium. In this case, Berkshire Hathaway took a risk and the result earned 4.8 billion dollars.

Another interesting example of the use of derivatives is associated with the airline. Since airlines are highly dependent on aviation fuel, whose price is constantly rising, businesses are very useful to use appropriate strategies of derivative hedging. The world's largest American low-cost carrier Southwest Airlines, a well – known example of success in this area. Thanks to the well thought-out hedging program the company managed to lock in the price of oil at a very low level and, as a consequence, within a few years to pay for the fuel by 25 to 40 percent less than competitors.

What are the main forms of derivatives?

There are four main kinds of derivatives: futures, forwards, swaps and options.

Futures and forwards

It’s a similar contract types, with some minor differences. Futures obligate the buyer to buy an asset at a specified price at a specific future date. Futures are traded on exchanges, so the contracts are similar and standardized. As for forwards, but this type of contracts more flexible and adaptable to the needs of the parties. Since forwards are usually traded on the OTC platforms, you should always take into account counterparty credit risk.


Give the buyer the right to buy or sell the underlying asset at a specific price. However, according to the contact, the trader is not obliged to buy or sell an asset that is a key difference between option and futures.


This derivative contacts that are often used by two parties to exchange one cash flow for another. The most popular types of swaps linked to interest rates, commodity resources and currencies. Generally, swaps involve exchange of fixed cash flow floating. That is, for example, swaps on interest rates allows the trader to exchange the loan with a floating rate to a fixed rate loan or Vice versa.

How to use derivatives KryptoStorage?

Cryptocurrencies are becoming increasingly popular, and more traders want to benefit from price fluctuations.

Source: Goldman Sachs

The rate of Bitcoin for the last two years survived a frantic race, soaring to a historical maximum of about 19800 USD and then just a few days after losing a third of its value. He continued to decline in 2018 until 3122 — is a conditional “bottom” of Bitcoin in the time interval 2018-2019. However in April 2019 the situation again began to change, and the current Bitcoin price in the area $ 8000 not pessimistic.

Trade Bitcoin futures was launched by Chicago Board options exchange CBOE and the Chicago Mercantile exchange CME at the peak of the bull market of cryptocurrency in December 2017. This step was an important milestone for the entire kriptonyte because futures contracts allow investors to hedge positions and mitigate risks of uncertainty, which is very important for cryptocurrencies. In other words, futures trading on Bitcoin and altcoins allows large traders to mitigate risks through the contract, payment for which is made directly in the base auction price of the cryptocurrency.

Moreover, many traders want to make money on such a radical change, trading in derivative contracts on Bitcoin and major altcoins. To capitalize on the sudden price change of the underlying asset, the trader can buy bitcoin at a low price and sell it later at a higher price. However, this strategy is relevant only during a bull market and very risky — as well as all other attempts to speculate on the price of the underlying asset.

Another strategy is called short selling (short positions) and is a way to make money even in a bear market of cryptocurrency, or the market, where there is a downward trend. To do this, traders usually take the assets on credit from a third party – whether an exchange or broker – and sell them on the market when the expected price reduction. When the coin falls, the trader buys the same quantity of asset at a lower price and wins on the change. Net of fees of the exchange or broker.

Where can I trade cryptocurrency derivatives?

Various cryptocurrency derivatives can be officially traded on traditional exchanges or on regulated cryptomeria.

Source: Shutterstock

As for the traditional exchanges, futures exchange now offers CME Group, whereas the CBOE stopped providing new contracts in March. Meanwhile, in December 2018, NASDAQ said that it is considering launching a Bitcoin futures in the first half of 2019. And as expected increase of the mass and the institutional adoption of cryptocurrency, it is likely that soon cryptocurrency derivatives will trade more traditional players.

Institutional exchanges also offer contracts. Institutional provider cryptocurrency derivatives LedgerX started to trade regulated swaps and options in October 2017, shortly after receiving the approval of the us Commission on trade trading futures. Other institutional cryptopleura, Bakkt several times postponed the launch of the trading of Bitcoin futures, but finally was launched on 23 September.

The main crypto currency exchange also actively engaged in the trade of cryptocurrency derivatives. Based in Malta, OKEx, the exchange offers futures trading and perpetual swaps – contracts that have no expiration, with a leverage of up to 100x. Supported a wide range of popular scriptaction the type of Bitcoin, Ethereum and EOS, and also listed newly-launched stablly USDK.

Are there any disadvantages to trade cryptocurrency derivatives?

All the trading strategies associated with price fluctuations imply a certain level of risk, particularly given the current lack of regulation of cryptocurrency derivatives.

Source: 2Биткоина

If we talk about cryptocurrency derivatives, the main risk faced by traders, is the volatility. Prices can rise and fall with dizzying speed, and the losses can be significantly multiplied in the case of margin trading.

This market is complicated, inexperienced users can be difficult to navigate. Mistakes due to inexperience can be very costly, and the unpredictability of cryptocurrency derivatives greatly increases the likelihood that something will go wrong. As a result, it is important to understand the options offered on the trading platform, follow the instructions and make sure you have a solid strategy.

You should also closely monitor the regulation. Regulators in different countries cautious look at cryptocurrency futures and other types of similar contracts and cryptocurrencies in General. The Commission on securities and exchange Commission (SEC) closely monitors this area and has already brought charges to the international dealer illegally offering Bitcoin swaps in the country. At the same time the European economic area has not yet developed clear instructions regarding how to review cryptocurrency derivatives and how they should be regulated.

In our cryptodata traders you will find lots of other useful information. Also looking forward to seeing you in Yandex Zen.

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