Looking for a crypto derivative definition that would give you a clear understanding of what this term means? Read ahead for all the information you need!
What Is A Derivative?
Generally speaking, a derivative is a financial instrument that gets its value from an underlying asset. For instance, the value of crypto derivatives is tied to cryptocurrencies, which enables traders to speculate on the future price movements of digital assets without actually owning them.
What You Need To Know About Derivatives
Derivatives have gained wide popularity in the crypto community. One of their key advantages is that they offer traders the opportunity to hedge their positions, which can help to mitigate risk in volatile markets.
Additionally, crypto derivatives allow traders to take advantage of market movements in either direction, which means that they can profit from both rising and falling prices.
There are several types of crypto derivatives, including:
- Futures. These contracts are a type of derivative that obligates the investor to purchase or sell an underlying cryptocurrency at a predetermined price on a specified future date.
- Perpetual swaps. This type of derivative trading product allows investors to hold positions open indefinitely, as they do not have an expiry date like traditional futures contracts.
- Options. Such financial instruments give the trader the right, but not the obligation, to purchase or sell an underlying asset at a predetermined price on or before a specified future date.
Each type of crypto derivative has its own advantages and risks. However, what is true for all crypto derivative instruments, is that they can be highly volatile due to the fluctuations of the cryptocurrency market. Besides, derivatives trading often involves leverage, which allows investors to use borrowed funds to increase the size of a position.
This could mean not only significant gains but also substantial losses, so it’s essential to have a thought-through risk management strategy in place before investing in crypto derivatives.
