What are Crypto Derivatives?

Chris Lowry
4 min readAug 29, 2023
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How it started:

I got a notice the other day that now you can trade derivatives on Bitcoin and Ethereum on Crypto.com.

Which made me curious.

Because I know that derivatives are risky.

High risk, unless you know what you’re doing and know how to hedge your bets.

But thinking about a derivative trade like betting helped me understand two things.

One, it’s okay to cover both the upside and downside.

And you can lose a bet, but still win in the long run.

So I set out to learn as much as I can about trading, and I’ll share what I learn here.

What intrigued me is that you can buy a $100 dollar contract and if Bitcoin goes up by 5% in your timeframe, you can earn $200 or more.

I watched Bitcoin go up 6% today alone, and I’ve watched it go down the day before.

Crypto is volatile right now.

But…

What if you could buy a contract that say’s its going up by Friday, and then saddle it with a contract that says it will go down when the Fed announces a rate increase?

What if you could learn a University’s worth of education in the next six weeks to prepare for the next bull run, then use derivatives to multiply your effort, and limit your downside?

Because you’ve seen a bunch of crypto dudes make a lot of money, and wondered why you were just a little late to the game?

Or if you missed out altogether.

What if derivatives gave you a second chance at your first six figures trading?

Let’s learn together

Buying and selling derivatives for cryptocurrencies involves trading financial instruments that derive their value from an underlying cryptocurrency asset.

Derivatives include futures, options, swaps, and other contracts that allow traders to speculate on the price movements of cryptocurrencies without directly owning the assets.

Here’s a breakdown of key concepts and considerations:

1. Types of Cryptocurrency Derivatives:

· Futures Contracts: These agreements obligate the buyer to purchase and the seller to sell a specific cryptocurrency at a predetermined price and date in the future.

· Options Contracts: These provide the buyer the right (but not the obligation) to buy or sell a cryptocurrency at a predetermined price and date. The seller receives a premium for granting this right.

· Perpetual Swaps: Similar to futures contracts, perpetual swaps do not have an expiry date. They are designed to track the underlying cryptocurrency’s price closely and often use a funding mechanism to maintain the contract’s price in line with the spot market.

· Swaps: These are contracts where two parties agree to exchange cash flows based on some underlying reference, such as the difference in price between two cryptocurrencies.

2. Benefits and Risks:

· Benefits: Derivatives can allow for speculative trading, hedging risk, and gaining exposure to cryptocurrency markets without holding the actual assets.

· Risks: Trading derivatives is inherently risky and can result in substantial losses. Leverage (borrowed capital) amplifies potential gains but also magnifies losses. Cryptocurrency markets are highly volatile, which can lead to rapid price fluctuations.

3. Marketplaces and Exchanges:

· Several cryptocurrency exchanges offer derivative trading. Some popular ones include BitMEX, Binance Futures, OKEx, and Huobi. Ensure you use reputable exchanges with good security practices and regulatory compliance.

4. Leverage and Margin:

· Many derivative contracts offer leverage, allowing traders to control a larger position with a smaller amount of capital. While this can amplify profits, it also increases the risk of losses.

5. Trading Strategies:

· Speculation: Traders can profit from price movements by going long (buying) or short (selling) derivative contracts.

· Hedging: Derivatives can be used to protect against losses in the spot market. For instance, a cryptocurrency holder can use futures contracts to hedge against potential price drops.

6. Research and Education:

· Understand the basics of derivatives and the specific contract you intend to trade.

· Analyze market trends and news related to the underlying cryptocurrency.

· Keep up-to-date with regulatory developments that might impact the derivative market.

7. Risk Management:

· Due to the high volatility of cryptocurrency markets, it’s crucial to have a clear risk management strategy in place.

· Avoid overleveraging to prevent significant losses.

· Consider using stop-loss and take-profit orders to automate trades.

8. Regulatory Considerations:

· The regulatory environment for cryptocurrency derivatives varies by jurisdiction. Ensure you understand the legal and tax implications in your region.

9. Start Small:

· If you’re new to derivatives trading, start with a small amount of capital until you become comfortable with the market dynamics and your chosen strategy.

Remember that trading derivatives, especially in cryptocurrency markets, carries substantial risks.

It’s essential to conduct thorough research, understand the products, and only trade with funds you can afford to lose.

If you’re uncertain, consider seeking advice from financial professionals.

Want to get a jumpstart on your strategy?

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Chris Lowry

Author at https://payhip.com/ChrisLowryBooks Runner writing books both fiction and non fiction, crypto investor, real estate and urban renewal.