Here’s why crypto derivatives are so significant to crypto traders
If you’ve been following the latest crypto trends, then you have probably noticed that there’s been a lot of speculation about the crypto derivatives market recently.
This has largely been driven by Bitcoin’s recent decline in mid-November, followed by a crash at the beginning of December which saw the price drop below $50,000. Although the price of Bitcoin seems to be creeping back up slowly, interest in derivatives trading has been on the rise, and it looks like it won’t be going anywhere any time soon.
If you haven’t heard of crypto derivatives, don’t worry – we’ll explain everything you need to know in this article.
What are crypto derivatives?
Derivatives trading is essentially the trading of contracts. It doesn’t actually require you to own the underlying asset. Rather, it involves owning a contract that includes an agreement to buy or sell a specific currency at a specified date in the future.
Derivatives allow you to take advantage of crypto volatility. If you expect a cryptocurrency to increase in value, you can go long. If you expect it to decrease in value, you can go short. Unlike spot trading which relies on prices going up, there is an opportunity for you to make money regardless of whether you think the price of a crypto coin will go up or down.
Derivatives trading is less well-known than spot trading, which involves trading commodities directly with instantaneous delivery. An example of spot trading would be going to a crypto exchange such as Coinbase and searching for a BTC/USD trading pair. You then exchange a specific quantity of USD for a specific quantity of BTC. Once the transaction is complete, BTC will be transferred to your wallet. You can then hold them here until the price (hopefully) increases.
Over the past year, crypto derivatives have become increasingly popular. Derivatives markets such as SynFutures – a platform that is essentially the Uniswap of the derivatives market – now have a direct influence on the price dynamics of cryptocurrencies.
What are the advantages of derivatives trading over spot trading?
First off, derivatives trading offers more flexibility than spot trading. While spot trading means that traders will only make a profit if their assets increase in value, derivatives trading offers an opportunity to make a profit regardless of the outcome. This flexibility means that derivatives trading is becoming increasingly popular with beginners, who are taking advantage of beginner-friendly DeFi platforms such as SynFutures that are trying to simplify the process. However, it is also commonly used by more experienced traders who want to protect their portfolios from unexpected risks.
Second, derivatives trading gives traders leverage. It costs a lot of money to buy a single Bitcoin, and most people don’t have $50,000 lying around that they’re ready to risk. Derivatives trading, on the other hand, enables users to take part for a fraction of the cost and requires them to spend less on a position.
Third, derivatives trading generally offers significantly more liquidity than spot trading because there always tends to be someone who is willing to take the opposing side of whatever position you have. This reduces slippage, and is generally associated with less risk.
What’s the best way to start crypto derivatives trading?
Given that derivatives trading is not as mainstream as spot trading, there are naturally fewer platforms suitable for beginners to get started.
SynFutures, which we mentioned previously, and DYDX are two of the most popular platforms for new users looking to dip their toes into the derivatives market.
Powered by the Ethereum blockchain, DYDX is an open platform for advanced crypto financial products. Founded in 2017 by former Coinbase and Uber engineer Antonio Juliano, it has quickly become one of the most advanced DeFi protocols today.
SynFutures was created much more recently in early 2021 – however, it is hot on the heels of DYDX. The platform has already come a long way in a dramatically short period of time. In June 2021, just a few months after launching, the platform raised $14 million in a Series A round led by Polychain Capital.
For traders who are willing to take the time to grasp the proper knowledge and risk management techniques to take part in crypto derivatives, the most powerful way to get up to speed quickly is to become part of a like-minded community.