This article will mainly introduce traditional financial derivatives and Cryptocurrency market derivatives, so as to lead to the introduction, function and role of derivatives in the Cryptocurrency market, and sort out the current development status of derivatives in the Cryptocurrency market, and summarize the future development trend of derivatives in the Cryptocurrency market.
What are Financial Derivatives?
Financial derivatives refer to contracts whose value depends on changes in the value of the underlying asset (Underlying Asset). This contract can be standardized or non-standardized. Standardized contracts mean that the trading price, trading time, asset characteristics, trading methods, etc. of the underlying asset (underlying asset) are standardized in advance, so most of these contracts are listed and traded on exchanges, such as futures; non-standardized contracts refer to the above. The parties to the transaction agree on their own, so they have strong flexibility, such as forward contracts.
The common feature of financial derivatives is margin trading, that is, as long as a certain proportion of the margin is paid, the full transaction can be carried out without the actual principal transfer. The settlement of the contract is generally carried out by cash difference settlement. Contracts performed in the form of Physical Delivery only require the buyer to pay the remaining amount. Therefore, financial derivative transactions have leverage effects. The lower the margin, the greater the leverage effect, and the greater the corresponding risks and benefits.
Derivatives are financial instruments whose value is derived from some underlying asset, such as stocks, commodities, currencies, interest rates, etc. Unlike underlying assets, derivatives themselves have no value, and their value is determined by the underlying asset. Derivatives can be used for trading activities such as risk management , speculation , and hedging . With the advent of Cryptocurrencies, they have also become an important part of the crypto market for market participants. Futures and options are two common types of derivatives, and perpetual futures are a special type of futures contract unique to the crypto market.
Traditional Financial Derivatives vs Cryptocurrency Derivatives
Since its birth, financial derivatives have been regarded as an effective tool to reduce the risk of market economy and stabilize the exchange rate risk of international trade.
Traditional financial derivatives
The traditional Financial Marekt definition of financial derivatives is: a contract for the exchange of assets at an agreed date and price. The basic types of contracts include forwards, futures, swaps (swaps) and options and hybrid financial instruments with one or more of these characteristics.
The value of a financial derivative depends on changes in the value of its underlying financial asset. Such as assets (commodities, stocks or bonds), interest rates, exchange rates or various indices (stock indices, consumer price indices). The performance of these elements will determine the return rate and return time of a derivative. The product form is a contract signed between the two main parties (buyer and seller), and it is executed in accordance with the contract requirements within a specified period of time.
Cryptocurrency market derivatives
Cryptocurrency derivatives refer to derivative transactions based on blockchain technology, which are automated and decentralized through smart contracts. Derivative contracts are a type of financial derivatives, including futures, options, contracts for difference, etc., which are a financial instrument derived from changes in the price of underlying assets. The characteristics of blockchain technology include decentralization, immutability, and anonymity, which make blockchain derivative contract transactions more transparent, secure, and efficient. Trading derivatives contracts through blockchain can provide investors with a more convenient, low-cost and efficient trading experience.
What are the functions of Cryptocurrency derivatives?
Derivatives are mainly used for hedging and speculation.
Hedging: This is a risk management strategy designed to reduce the risk of losing an existing position. For example, traders buy Bitcoin at Spot Market because they believe the price of Bitcoin will rise. However, traders are also concerned that they may be wrong and want to minimize losses in the event of a decline in the price of BTC. If the price of BTC falls, short BTC futures positions will profit, offsetting losses on BTC spot positions.
Alternatively, a long put option with BTC as the underlying asset can also hedging the risk, because if the BTC price falls, the long put option will profit.
Speculation: This refers to betting that the price of an asset will rise or fall, and then trading long or short to profit from it. Since crypto options and futures use leverage, any gains can be magnified, but equally, losses can be magnified.
Current development of Cryptocurrency and future development trends
Crypto-assets offer a new world of opportunities: fast and convenient payments, innovative Financial Services, and inclusive access to previously "unbanked" parts of the world, all thanks to the crypto-asset ecosystem.
While crypto asset adoption is difficult to measure, surveys and other indicators suggest that Emerging Markets and developing economies may be in the lead.
Going forward, widespread and rapid adoption of crypto-assets could pose significant challenges, as it reinforces the trend towards dollarization (or crypto-capitalization) in the economy, with residents beginning to use crypto-assets instead of their national currencies. The trend towards crypto-capitalization could undermine the ability of central banks to effectively implement Monetary Policy. It could also raise financial stability risks, such as financing and repayment risks arising from currency mismatches.
Weak central bank credibility, fragile banking systems, inefficient payment systems, and limited availability of Financial Services in some Emerging Markets and developing economies may fuel the trend towards crypto-capitalization.
Finally
Cryptocurrency derivatives trading is derived from tried and tested products in the traditional financial field, and finally took root in the Cryptocurrency field. The Cryptocurrency contract market is currently very popular, and trading platforms with high volume and strong liquidity can be found everywhere. Nonetheless, trading in the Cryptocurrency market involves high financial risks . Before starting trading, it is necessary to fully understand the working mechanism of contract trading.
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