The crypto market is in many ways similar to the stock market. While we cannot deny its uniqueness in being a digital asset, the procedures for trading and making profits run parallel to the stock market.
Derivatives are one such example. In general terms, derivatives are financial products whose value depends on another asset. Derivatives can be contracts or securities and get their value from (crypto) currency, commodities, market stock, interest rates, and bonds, among other assets.
Over the years, derivatives have become popular financial tools. In the crypto market, derivatives are traded among customers (C2C) and on exchanges, though the way they are regulated and traded is different. Businesses use crypto exchange software development services to integrate derivatives trading on their platforms.
Types of Derivatives
Derivatives are usually divided into the following types.
- Futures: The buyer is obliged to purchase an asset at a price previously agreed upon that has been set for a certain date in the future. Traded on the exchanges, futures are standardized contracts.
- Swaps: As the name suggests, these derivatives are used to exchange one type of cash/ crypto with another to make a profit at a set time in the future. Loans, bonds, etc. are the assets exchanged by switching from a fixed interest rate to a variable interest rate or vice versa.
- Options: These are again similar to futures where the contract allows the seller or buyer to buy or sell the said asset at the pre-fixed price within the specified timeline. But the difference is that with options, it is not mandatory for the trader to the asset as per the contract.
- Forwards: Forwards are similar to futures except that they can be customized to suit the requirements of the trader. Flexibility is an advantage of trading forwards. These are normally traded via OTC (Over the Counter), and hence it is necessary to consider the various risk factors associated with it.
- Perpetual Futures Contract: This contract doesn’t expire in time. The trader can hold it for any time and close it whenever they want to. These contracts are highly volatile as they are used as a funding mechanism and so have to be traded with extra care.
Use of Derivatives in Crypto Trading
Derivatives are usually used to speculate on the future or handle risk quotient in the volatile market. In the crypto market, derivatives are used to get benefits from the fluctuations in the price of the cryptocurrencies.
By using cryptocurrency exchange software development, some platforms are offering traders to trade in derivatives and contracts, though it is still quite limited to few altcoins and Bitcoin.
Why is Crypto Derivatives Important?
With the success of existing crypto exchanges that offer trading in derivatives, it can be said that there will be an increase in the number of platforms providing options and futures trading. Analysts and experts are of the opinion that derivatives will continue to gain popularity as more trading options between cryptocurrencies and fiat are offered to the traders.
The market competition is getting fierce with famous and new companies announcing collaborations and services for crypto derivatives on their exchange platforms. More professional traders are opting to trade in derivatives for both short-term and long-term.
The trading volume has been showing a steady increase, signaling that the crypto market is more than ready to accept derivatives, even if the newcomers might feel overwhelmed with the complexities of the process. In fact, exchanges are said to be finding ways to simplify the derivatives market and make it more client-friendly, safe, and secure.
While we cannot ignore the advantages of derivatives in the crypto market, it is essential to exercise caution. The U.S. Securities and Exchange Commission (SEC) has been very closely monitoring crypto exchanges. It is recommended to understand the various intricacies of crypto futures and other such contracts and get the necessary permissions before offering trading in the futures and options crypto market.
If you are planning to integrate derivatives trading into your crypto exchange, Antier can help. Backed by a team of seasoned blockchain developers and technical prowess, we offer mission-driven cryptocurrency exchange software development services to our clients globally.