Cryptocurrency derivatives refer to various financial instruments traded through blockchain technology-based trading platforms. Similar to traditional financial derivatives, the trading method of Cryptocurrency derivatives is based on an arbitrage strategy that predicts future market price movements. Next, we will specifically introduce different types of Cryptocurrency derivatives and risks.
Introduction to Cryptocurrency Derivatives
At present, the mainstream derivatives in the Cryptocurrency market are: leveraged trading, futures contracts and options contracts. Among them, some Cryptocurrency exchanges do not classify leveraged trading and leveraged tokens as one of the derivatives, but these two different trading methods do bring users a variety of operations and can achieve the effect of derivatives.
1. Future trading
Future trading is a way of trading assets using funds provided by a third party. Compared with regular spot trading, leveraged trading allows users to obtain more funds, amplify trading results, and enable users to make greater profits in profitable trades.
In traditional Financial Marekt, Future trading is generally referred to as margin financing, and borrowed funds are generally provided by stockbrokers. In the Cryptocurrency market, however, borrowed funds are usually provided by other users on the exchange. Funding providers earn interest by placing assets in exchanges, users who borrow assets through leverage pay leverage interest, and the exchange acts as an intermediary by deploying assets and obtaining fees from them.
Future trading can be used to open long and short positions. Long parties can borrow stablecoins to buy cryptocurrency reflecting the user's expectation of an increase in the price of the asset; while short parties borrow cryptocurrency to sell immediately and buy back the corresponding currency after the market falls, reflecting the opposite of long positions. When opening long or short positions using future trading, the trader's assets will act as collateral for the borrowed funds.
The advantage of future trading is to open leveraged trades in multiple currencies at a lower investment cost, thereby bringing higher returns to investors. Compared with spot trading, which can only buy and go long, leveraged trading provides investors with the opportunity to short and make profits when the market goes down. But when users make wrong judgments about the direction of the market, leveraged trading will also bring serious losses to users. High leverage borrowing means that small fluctuations in market prices may also make users lose all their margin.
Due to the risk of liquidating positions in leveraged transactions, individual exchanges provide users with full position leverage and position-by-position leverage. Full position leverage is a leveraged transaction that supports all trading pairs in the account, and the assets in the account are guaranteed and shared with each other. Once a position is liquidated, all assets under the account will be positioned squaring. The position-by-position leverage means that each trading pair in each account has an independent positioning, and the risks of each position-by-position account do not affect each other. Once a position is liquidated, it does not affect the rest of the position-by-position accounts.
Overall, the position-by-position leverage function has a stronger sense of risk management and control for the user's overall positioning, and can isolate the risks of different assets from each other, but users need to always pay attention to the margin situation of different lending assets. The full position leverage function is conducive to the risk management and control of a single asset. Compared with position-by-position, the centralized sharing of margin can better buffer the out-of-position situation of a single currency, but the extreme market of an asset may cause all positioning. All positions are squaring.
Derivatives
Futures are the oldest derivatives in the Cryptocurrency market and are currently the most traded derivatives. There are two types of futures in the Cryptocurrency market: settlement contracts and perpetual contracts.
A, Settlement introduction
Settlement contract is a crypto asset derivative product. Users can obtain gains from the rise/fall of digital asset prices by judging the rise and fall, choosing to buy long or sell short contracts. The settlement contracts of mainstream Cryptocurrency exchanges generally use the settlement of differences model. When the contract expires, the exchange will position squaring all contract orders that have not been position squaring.
At present, the settlement time of settlement contracts in the Cryptocurrency market is mostly divided into "the week, the next week, and the quarter", and a certain multiple of leverage can be added. At present, mainstream exchanges support leverage of up to 125 times. In the market with severe market fluctuations, the risk of liquidation is higher.
B. Introduction to perpetual margin
Perpetual margin are an innovative derivative that is similar to settlement contracts. However, perpetual contracts do not have a settlement date and users can hold them all the time.
In traditional financial futures contracts, one party involved in the contract often needs to hold a contract subject matter (mainly commodities, such as wheat, gold, copper, etc.), and holding the subject matter will actually increase the cost of the contract. Of Carry, resulting in a larger spread between the contract market and the Spot Market. In order to ensure long-term convergence between the price of perpetual contracts and the price of spot targets, exchanges basically use the method of funding rates.
The funding rate refers to the settlement of funds between all long and short positions in the perpetual contract market, which is settled every 8 hours. The funding rate determines the payer and the payee; if the rate is positive, the long pays the short; if it is negative, the short pays the long. This can be thought of as a fee for the trader to hold a contract position, or a refund. This mechanism can balance the demand for perpetual contracts between buyers and sellers, so that the price of perpetual contracts is basically consistent with the price of the underlying asset. Almost all mainstream Cryptocurrency exchanges have supported Perpetual Contracts, with a leverage ratio of up to 125 times. Perpetual Contracts are also the most popular derivatives in the market.
Difference Between Settlement and Perpetual
1. The operation of perpetual contracts is simple, and there is no need to consider steps such as settlement and change positions, and it can provide almost the same use experience as spot goods. For investors, the professional investment threshold is lowered. If the settlement contract is automatically settled by the system when it expires, a settlement fee needs to be paid. Compared with perpetual contracts, you need to always pay attention to its settlement time.
2. Investors can hold perpetual contracts for a long time to obtain higher ROI, but it should be noted that there will be a fund rate settlement every eight hours. If the contract is held in the direction of the fund payer, the asset will cause slight losses. Due to the rules of the capital rate, large contract traders generally position squaring before the settlement time of the capital rate to avoid capital wear and tear, while more professional quantitative investors will use the long-short ratio and market conditions to open positions to become the beneficiaries of the capital rate.
3. The perpetual contract price is anchored to the Spot Market price, while the settlement contract price deviates greatly. Due to the funding rate mechanism, the contract mark price of the perpetual contract is always close to the spot price. The farther the settlement contract is from the settlement time, the higher the deviation between its price and the spot price, and when the settlement time is approaching, the volatility is often large due to the increase in the trading volume of position squaring, which is prone to the phenomenon of "pin" (pin refers to the contract price of a certain Cryptocurrency. Due to market manipulation and other reasons, the price quickly rises or falls at a certain point in time, and then quickly returns to the normal price. Although the price has not changed, it has caused a large number of positioning explosions.).
C, Forward contracts and reverse contracts
In the Cryptocurrency market, forward contracts are also called stablecoin contracts, which use stablecoins (USDT) to act as margin in contracts. Reverse contracts, also known as currency-based contracts, use currencies as contract margins for corresponding trading pairs.
Derivatives in traditional Financial Marekt are generally positive contracts, that is, cash is used for settlement, while reverse contracts are innovations in the Cryptocurrency market. The use of Cryptocurrency (BTC, ETH, etc.) to become collateral for the opening of derivatives has greatly increased Cryptocurrency Demand in the secondary market promotes market liquidity.
Difference between the two
1. Different pricing units: The USDT-based perpetual contract is denominated in USDT; the currency-based perpetual contract is denominated in USD. Therefore, the index price between the two will also be different. For example, the index price of the BTC/USDT perpetual contract is the price of the BTC spot against USDT; while the index price of the BTC/USD currency-based perpetual contract is the price of the BTC spot against the US dollar.
2. The contract value is different: The value of each contract of the USDT-based perpetual contract is the corresponding underlying currency, such as the face value of BTC/USDT is 0.001 BTC; the value of each contract of the currency-based perpetual contract is USD, such as the face value of the BTC/USD contract The value is $100.
3. Different currencies that act as collateral assets: USDT-based perpetual contracts All varieties of contracts use the denomination currency USDT as a collateral asset, and users only need to hold USDT to participate in the transactions of various varieties of contracts; currency-based perpetual contracts use the underlying currency as a collateral Assets, users need to hold the corresponding underlying currency to participate in the transaction of this variety of contracts, such as BTC/USD currency-based perpetual contracts, users need to transfer to BTC as a collateral asset.
4. Calculation of profit and loss currencies are different: USDT-based perpetual contracts All types of contracts use the denomination currency USDT to calculate profit and loss; currency-based perpetual contracts calculate profit and loss based on the underlying currency, such as user transactions BTC/USD currency-based perpetual contracts, and the currency of profit and loss is BTC.
The difference in settlement currency ultimately affects the advantages and disadvantages of the two contracts, resulting in different usage scenarios.
III. Option
Options are an increasingly popular way of investing in digital assets. They are a form of financial derivative that gives the holder rights, but no obligation to buy or sell a certain amount of Cryptocurrency at a predetermined price before a specific date. This type of trading allows investors to take advantage of the rise and fall of the market without owning any tokens. It also offers investors the opportunity to make more money in the short term with greater leverage compared to buying Cryptocurrency outright. Options contracts can be used both as a form of hedging other investments and as a way to speculate on price movements.
Depending on the broker, there are different types of options contracts available, including American-style and European Style Option . American-style options can be called-over any time before the expiration date, while European Style Option can only be called-over before the expiration date. There are other types of crypto options, such as cash settlement, binary, and SPOT (simple payment option trading).
Options trading is a highly leveraged form of trading that can be risky for inexperienced traders. Before trading options, it is important to do research and understand the terms of the trade to make an informed decision. As with any investment, crypto options should be used with caution and only those with sufficient trading knowledge should consider them.
One of the advantages of crypto options is that they are becoming more widespread and more brokers are offering them. As a result, investors have access to a wider range of options, which helps diversify their portfolios, while also giving them more control over the price they pay and the amount of risk they take. In addition, crypto options can be used to hedging other investments, making it possible for investors to mitigate the effects of market volatility and uncertainty
Crypto options have revolutionized the way digital assets are traded, offering investors new opportunities to diversify their portfolios and take advantage of the rise and fall of the market without actually owning any tokens. However, it is important to understand the risks associated with trading options and make informed decisions about your own investments.
For those looking to enter the world of crypto options, it is important to do extensive research and find a reputable broker that offers access to premium options. With some knowledge and understanding, investors can utilize these unique trading tools to maximize their profits and minimize their risks.
Why use crypto derivatives
Cryptocurrency derivatives are a powerful trading tool that allows traders to maximize profits and reduce risks in the Cryptocurrency market. Here are some reasons why crypto derivatives should be considered when trading Cryptocurrency:
1. Increase Leverage - Cryptocurrency derivatives provide traders with the opportunity to increase leverage, allowing them to make larger trades with less capital. This is especially beneficial for traders who want to make large profits with small investments.
2. Reduce Risk - Crypto derivatives can be used to hedging market volatility, which helps reduce potential losses from trading. Through hedging, traders can limit their Downside Risk while maximizing their Upside Potential.
3. Increased liquidity - Crypto derivatives are traded on highly liquid exchanges, making it easier for traders to open and close positions quickly. This allows traders to take advantage of rapid market movements without waiting for trades to settle.
4. Low Fees - Finally, Cryptocurrency derivatives trading fees are generally low compared to other forms of Cryptocurrency trading. This makes such trading more attractive to both retail and institutional investors
Cryptocurrency derivatives have grown in popularity in recent years due to their multiple advantages over traditional cryptocurrency trading methods. With the right risk management strategies, traders can use Cryptocurrency derivatives to maximize profits while reducing potential losses. Therefore, Cryptocurrency derivatives should be considered when trading Cryptocurrency.
Summary
In conclusion, Cryptocurrency derivatives trading provides traders with an opportunity to take advantage of the volatility of the digital asset market and earn more money than traditional investments. This type of trading also allows speculation on future price movements as well as hedging losses. Ultimately, the goal of trading Cryptocurrency derivatives is to make profitable trades and maximize profits, while managing risks according to personal goals and preferences. With the right approach, traders can earn substantial profits while reducing risk.
About X Exchange
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Here are some operational terms for Cryptocurrency futures:
1. Opening - Opening a new position in futures
2. position squaring - closing an existing futures position
3. Long traders who hold bullish positions
4. Short - Traders who hold bearish positions
5. Leverage - the ability to increase the size of a position by borrowing
6. Margin - the amount of money a trader must pay when opening a position to secure their trading position
7. Strong leveling - mandatory position squaring to reduce losses when a trader's margin account falls below a certain level
8. Contract Specifications - including contract face value, price step, minimum change unit, etc
9. Contract expiration - end date of futures contract
10. Settlement date - the date of settlement in kind or in cash after the contract expires
11. Positions - the total number of currently unpositioned squaring contracts
12 Volume - the number of contracts that have been traded on the exchange or platform
13. Depth of Market - Shows the order quantity and price of buyers and sellers
14. Arbitrage - using price differences to make profits from trading between different markets or exchanges
15. Flexible Margin - a mechanism that allows traders to adjust margin requirements based on market fluctuations
16. Opening Price - The price of the futures contract at the time the position is opened
17. Settlement price - the average price of the futures contract at expiration
18. Liquidation - When the trader's margin account is reduced below the Maintenance Margin level, the system automatically triggers position squaring
19. Contract Value - The value of a futures contract, determined by contract specifications and price
20. Settlement - When the futures contract expires, cash or Physical Delivery is made according to the contract.
21. Limit Order - Limit Order allows the user to set the order price, and the order will be filled at the order price or a better price than the order price.
22. Market Order - The market order will be filled at the best price available in the order list at that time. There is no need to set the price by yourself, which can make the order quickly filled.
23. Plan order - There is a trigger price. When the base price (market price, index price, reasonable price) selected by the user touches the trigger price, the normal price limit after the trigger price will occur.
24. Only do Maker - The order placed under this strategy order will not be immediately traded in the market, ensuring that the user is always a Maker and enjoys the benefits of obtaining a handling fee when trading as a liquidity provider; at the same time, if the order is related to the transaction of an existing order, the order will be revoked immediately;
25. Immediate transaction or cancellation - the order is fully completed at the order price or better price, or it will be completely cancelled, and partial transaction is not allowed;
26. Full Position - Full Position uses all the collateral in the account as the margin, and all positioning shares the margin.
27. Position-by-position margin - position-by-position uses the margin in the internal part of the account, and each positioning is independent.
28. Initial Margin - The minimum amount of Cryptocurrency that must be deposited to start margin trading.
29. Maintenance Margin - The minimum amount of Cryptocurrency required to continue trading on margin.
30. Basis - The spread between the futures contract and the underlying Spot Market.
31. Marking Price - Used to quantify unrealized gains and losses for all traders to avoid market manipulation and ensure that perpetual contract prices match spot prices.
32. Funding Rate - Periodic payments to long or short traders based on the gap between the perpetual contract market and the spot price. If the funding rate is positive, the long pays the short - if the funding rate is negative, the short pays the long.
