The various derivatives of the crypto ecosystem

The various derivatives of the crypto ecosystem

The cryptocurrency ecosystem is teeming with a variety of financial products and services. Some of the more popular among these offerings are crypto derivatives. Much like the ecosystem which encompasses it, crypto derivative trading presents an almost inexhaustive range of opportunities. This blog post will explore the several leading types of crypto derivatives, from perpetual contracts to options trading, and the distinctions between them.

In finance, a derivative is an investment that derives value from an underlying asset (i.e., bitcoin). Permitting traders to wager upon the value of an underlying asset with the opportunity to harness leverage, crypto derivatives—such as bitcoin futures contracts—provide a valuable avenue for speculation.

Over the past few years, Bitfinex* has embraced this burgeoning interest, developing its platform to incorporate a wide array of derivative products, which are discussed in detail below.    

Futures market explained

The most prevalent derivative—is the crypto futures contract. During a bitcoin futures trade, two parties commit to buying or selling BTC on a specified date for a predetermined amount.

However, crypto futures contracts are more than merely a wager on an underlying asset; they also present a valuable hedging opportunity. For instance, traders with an existing spot position in BTC can mitigate price fluctuations by taking an opposing position within a bitcoin futures contract.

Unlike spot trading, crypto derivatives markets make use of leverage. Leverage enables traders to borrow capital in order to finance a contract. Leverage enables traders to borrow capital in order to finance a contract. Leverage is typically employed to fund a greater position without the need for a significant equity stake upfront. 

Perpetual contracts (and how they differ from crypto futures)

Perpetual contracts operate exactly like a traditional crypto futures agreement—with one crucial differentiation: they don’t expire.

Perpetual contracts are the best of both worlds, permitting the intuitiveness of spot market trading while preserving the advantages of the futures market, such as leverage, and risk hedging.

By allowing indefinite expiry, traders can hold a position as long as they’re able to fund it. This enables a more convenient approach to futures trading, with funding made every 8 hours to ensure the position stays open. 

What is options trading?

Options give traders the right to buy or sell an underlying asset without the obligation to buy or sell it. Similar to futures, traders undertaking a call option or a put option agree on a specific price and period for the contract.

However, unlike traditional future agreements—whereby parties both sides of the trade are obligated to buy/sell at expiry—options don’t require participants to buy/sell, they simply make the option available. 

But how does options trading work?

Using a real-world example, let’s assume a trader wants to buy 10 bitcoin at $10,000 per BTC. However, given the market’s propensity for wild swings, the trader is worried about a price slump. With call options, they can buy the opportunity to purchase 10 BTC for a sum of $100,000 for a specified period. Once expiry comes around, no matter whether the price shoots up or plummets down within that time, the trader has locked in the choice to buy or walk away.

Let’s imagine that by the end of the expiry period, bitcoin has managed a 2x move to $20,000. The trader gets to buy bitcoin for the predetermined options rate and sell for the market price—making a total profit of $100,000.

Bitfinex’s Crypto Derivatives

Bitfinex Derivatives currently offers markets in perpetual futures with up to 100x leverage. A recent interview with Bitfinex CTO Paolo Ardoino revealed that Bitfinex Derivatives is looking to adopt options trading inside Q1 of 2020.

Derivatives provide a multitude of advantages, offering a low-barrier to entry as well as granting the ability to hedge bets on existing positions. While the underlying market offers a somewhat one-dimensional avenue for speculation, derivatives open up a unique range of trading opportunities.

*The derivatives platform is provided by iFinex Financial Technologies Limited. References to Bitfinex Derivatives in this post are references to iFinex Financial Technologies Limited.

Agustin Sanchez