Cryptocurrency trading has evolved quite a bit over the last decade. Many of the biggest crypto exchanges in the market have now introduced complex financial products that are often inspired by traditional finance. One such financial product is crypto derivatives trading. Let’s take a look at crypto derivatives and how they fit into the world of futures, options, and perpetuals in crypto.

What Are Crypto Derivatives?

Derivatives are like a financial handshake between two traders: one takes the plunge as the buyer, the other as the seller. These contracts set the stage for trading an asset at an agreed-upon price on a set date, either with a firm obligation or the option to make the move.

The profit and loss made comes from the difference between the contract price and the actual price. Traders can buy or sell these contracts during their lifetime for profit or for reducing risk.

The major components of crypto derivatives trading contracts are as follows:

• Underlying asset: This is the cryptocurrency that the contract is based on. It’s the crypto agreed to be bought or sold at a set price.

• Quantity: This is how much of the underlying asset will be traded. It could be just one unit, 100, or even thousands of a particular crypto.

• Settlement date: The date when the contract is set to be exercised. This is when the underlying asset changes hands.

• Method of delivery: This is how the trade is paid out. It could be the actual asset being traded or a cash-settled equivalent, using fiat currency or stablecoins.

How Does Crypto Derivatives Trading Work?

As mentioned before, crypto derivatives trading works by allowing traders to make bets on the future price movement of cryptocurrencies, without the need of owning that crypto. The main types of crypto derivatives are as follows:

• Futures: With futures, traders must purchase and sell an asset at a stated price on a precise date. The trader then earns a profit or incurs a loss as the market moves.

• Options: Options provide traders the facility to sell or buy at a rate around contract expiration. However, this is not compulsory.

• Perpetual Contracts: Perpetual contracts are almost identical to futures contracts. They do not have a time limit, which means the trader can keep the position open indefinitely as long as the amount needed for margin is held.

Are there any pros and Cons of Crypto Derivatives Trading?

When it comes to to the pros of crypto derivatives trading. traders can trade without wallet hassles or without owning the cryptocurrency. They can enjoy the advantage of lower fees when compared to spot trading. They can also amplify their potential gains with marginal trading, up to 100x.

However, there might be loss of funds due to exchange failures or hacks which is a major con. Also, due to market volatility, prices tend to swing wildly.

Conclusion

Crypto derivates are a relatively new form of trading which provides traders with the power of speculation, leveraging and hedging, without one major thing- traders dont have to own the underlying asset.  However, its not all sunny, as traders need to understand the risks associated, such as risks of leverage, and market volatility.