A derivative is a financial contract between two or more parties that bases its value on the asset on which it is based, in this case cryptocurrency. To clarify, derivative trading is an agreement to buy and sell an asset, be it stocks or cryptocurrency at a predetermined price and time.

Derivatives themselves have no value, based entirely on estimates of the future value of the assets selected. In general, there are three types of derivative products, namely Swaps, Futures, and Options.

Why choose Crypto Derivatives Trading?

Currently cryptocurrency is still relatively new in adapting to the derivatives market, so there are only a few options for the derivatives market that exists in that market. One that is quite popular is Bitcoin futures and options, because Bitcoin controls more than 50% of the cryptocurrency market, making BTC the largest and most traded coin.

Whereas derivative trading is quite complicated and is often only done by professional traders. There are several reasons why derivatives are better.

The first reason, with derivatives everyone can reduce risk and protect themselves from fluctuations in the price of the selected asset. Apart from being protected from price volatility with derivatives, it is also possible to determine the amount to trade in the plan to protect yourself from excessive fluctuations.

The second reason, hedging, or the ability to protect investments by offsetting potential losses that exist. Many say things like having an insurance policy for an investment portfolio. With the ability to hedge, one can still profit in either a bearish or a bullish market.

The third reason, Speculation. Many traders use derivatives to speculate on cryptocurrency prices. The goal, of course, is to profit from the price movements of the selected asset. For example, a trader can make a profit by buying a derivative contract and anticipate a decrease in the price of a selected asset by shorting it. Speculation is considered negative because it causes a high level of volatility in the market.

In traditional markets, the way to make a profit is to buy coins at a low price and then sell them at a higher price later. However, this is only possible in a bullish market or if the trend is up. Shorting is a way of getting profit when the bear market or trend is down.

Currently there are only a few cryptocurrency exchanges that can trade derivatives. Some of the big ones are Bitmex, Binance, OKEX and Tokenomy. Derivatives trading allows users to profit in every situation, bearish or bullish market. However, derivatives have a high level of complexity so they are generally carried out by professional traders or experienced technical traders.

Knowing the Types of Crypto Derivative Trading: Futures and Options

As we know in crypto derivatives trading, there are two types of products that are currently trending, namely futures and options. Many still think that these two products are the same, but in fact they have some differences. Before we discuss the level of risk, let us discuss the differences further.

• Future

A future or futures contract is a cooperation contract that binds two or more parties to buy and sell crypto at an agreed price and at a predetermined time. This makes you obliged to buy or sell according to the contract that you agree to. This means that a large amount of capital is needed in accordance with the contract that will be paid later. You have unlimited potential profit by trading futures, but this is directly proportional to the potential risk of loss which is also unlimited.

In terms of fees, futures contracts have clear and easy to understand fee terms. The fees charged generally are transaction commissions, exchange fees, and brokerage. In futures trading using the terms buy, long and sell, short which can be said to represent buying and selling.

• Option

Option is a cooperation contract that gives the right to sell or buy cryptocurrency at a predetermined price. However, you can buy and sell before or when the contract ends. Options are said to have lower risk than futures because in options you are required to pay a premium in advance and the loss value will not exceed the premium value.

However, options still carry risks, as the premium value will decrease over time, especially as the deadline approaches. The fluctuating premium value can be caused by many things, such as differences in product prices and strike prices, validity period and others. This causes the need for the ability to analyze the direction of the market so that the value of the premium does not shrink before the profit target is achieved.

Futures and options carry a high level of risk and require in-depth market analysis. This causes both products to be recommended only for more experienced traders. But now there are many alternatives that can help you get more optimal results and minimize risk, one of which is the trading algorithm.