Crypto derivatives explained

A derivative is a well-organized trading instrument that can offer traders an edge in managing risks and multiplying profits. The underlying assets can be stocks, bonds, currencies, commodities, interest rates and market indexes.

Cryptocurrency derivatives were recently introduced in the market and the first Bitcoin-based futures contract began to trade on the Chicago Board Options Exchange (CBOE) and Chicago Mercantile Exchange (CME) in December 2017.

The main objective of trading and investing is to make profits by maximizing rewards and minimizing risk. Derivatives crypto products offer traders a capital-effective way of expanding exposure to crypto.

BitMEX is one of the most accepted cryptocurrency trading sites and it is a derivatives exchange. On BitMEX, you are not actually trading Bitcoin. Unlike Coinbase, where you can buy Bitcoins and transfer them to your wallet. But you will make bets on the future Bitcoin price


Why use?

1. They offer bigger liquidity/volume than classic exchanges:

We can notice that the derivatives platforms have a volume trading a lot higher than the classical platform (on average 10 times higher), for mainly two reasons: the traded asset does not need to be on the platform and also because of leverages possibilities which have been explained below.

2. They offer higher leverage possibilities (up to 100x):

Derivatives crypto products can offer higher leverages than in traditional finance, it can be up to 100x. For those unfamiliar with the leveraging feature, it simply means that for instance with 1,000$ worth of collateral, you can trade up to 100,000$ of assets. Therefore, it creates more volume because users can trade more than what they have on the platform. 

3. Wide uses:

There are many uses of derivatives crypto products such as:

3.a Getting exposed to a crypto asset without owning them:

Just like classical crypto exchanges, the derivatives platforms will let you be exposed to a crypto price. But because of their unique features (leverages possibilities and more liquidity), they become perfect for short to mid-term trading. For a long-term trade, we recommend the classical platform, you will find how to buy guides on website.

3.b Hedge your crypto asset against the USD without triggering a tax event:

Derivatives crypto products are a part of an active risk management strategy. It functions as an insurance type for your cryptocurrency portfolio. As a long-term investor, when the asset’s price goes down, there is no requirement to sell with a loss, or “hold”. As an alternative, you have the option to go short until the market recovers. People usually prefer to opt for a futures contract to hedge a certain amount of risk and that too without triggering a tax event.

How to trade derivatives?

There are some basic steps involved that you have to follow when you start derivative trading.

1. Choose platform:

When you want to trade derivatives, you first need to choose a platform, the main differences between those are the available assets (for instance Binance futures/FTX offer lots of different assets, if you are an altcoin trader you will surly chose them), the liquidity available (for instance Bitmex and Bybit offer fewer assets but have much bigger liquidity, perfect if you are looking to trade big volume). We will help you to find the right platforms that suit you down below. 

2. Deposit/buy collateral:

Because you trade assets without owning them, the platforms required collateral to insure the risk, it can be crypto assets or stablecoins.

3. Choose an asset and start trading:

When everything is set, you can start trading. Simply choose the asset you want to trade, enter the correct amount, then regarding the nature of your bet, choose either buy or sell (sometimes referred in their financial terms: long or short). 

What are the options for derivatives crypto products?

Here we give you a short description of top derivatives crypto platforms.

1. Binance futures:

Best for Altcoins

Binance logo

  • Credit Card
  • Cryptocurrency

Binance Future has kept a simplistic design in all its interfaces. It’s with the intention that users can navigate through a sea of options without the need to be learning from scratch the operation on the new platforms. If you’ve used Binance Exchange in the past, you’ll feel right at home when you experiment with Binance Future.

2. Bitmex:

10% Fee Discount

BitMex logo

  • Cryptocurrency
  • Up to 100x leverage

BitMEX is an abbreviation of the Bitcoin Mercantile Exchange; it is an operator whose main product is cryptocurrency derivatives. It is known to be one of the most used platforms with a great daily volume.

3. Bybit:

Bybit logo
  • Cryptocurrency
  • Good for Altcoins
  • Up to 100x leverage

Bybit is a cryptocurrency exchange in the British Virgin Islands. It is an exchange of derivatives of cryptocurrencies, focused on the currency pairs BTC/USD, ETH/USD, and XRP/USD. They are known to offer great liquidity and daily volume.

4. Huobi Global:

huobi logo
  • Cryptocurrency
  • Up to 125x leverage

Huobi Global was created in 2013 and is a leading crypto platform, they are mostly very popular in Asia. One of the best reasons to trade on Huobi is that they also have a classical exchange on the same website, which mean you can do all kind of trading without have multiples platforms.

5. FTX:

ftx logo
  • Move Contracts
  • 40+ leveraged tokens

FTX crypto derivate exchange is built for “traders and traders”. The special added feature you will find on FTX is the trading of the index, which mean they offer a lot option for trading.

6. OKEx:

OKEx logo
  • Crypto-to-Fiat trading
  • Up to 100x leverage

OKEx is a branch of numerical securities of the world’s first plan, assuring advanced financial services for international traders using the technology of the blockchain.

OKEx offers hundreds of token and futures pairs to help brokers optimize their strategies.

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Written by Narender Charan

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