April 7, 2022

What are Cryptocurrency Derivatives?

Cryptocurrency derivatives have become very popular in recent years. They are helping investors and traders expand their technical knowledge in cryptocurrencies and search for new and valuable opportunities to trade virtual currencies.

Cryptocurrency derivatives have become very popular in recent years. They are helping investors and traders expand their technical knowledge in cryptocurrencies and search for new and valuable opportunities to trade virtual currencies. Rather than relying on traditional digital assets, they prefer to use derivatives and search for new ways to profit in the cryptocurrency market. 

But what are cryptocurrency derivatives? How can we trade them? Are they risky? We share with you all the information that you should know about cryptocurrency derivatives in the next few sections of this blog post. 

What are Cryptocurrencies?

Cryptocurrencies are becoming more and more popular day by day. They are digital currencies that are encrypted and decentralized, making them difficult for governments to control and regulate. Cryptocurrencies use cryptography to process transactions and create new coins in a public, verifiable ledger without the need for any central authority or bank.

The popularity of cryptocurrencies has led to an increase in interest, as well as a rise in prices. There are now thousands of them and the range of services that can be paid for with them is expanding.

Most cryptocurrencies rely on blockchain technology. Blockchain is a technology in which transactions made in cryptocurrencies are recorded chronologically and publicly. It’s considered a public ledger that keeps records of crypto-transactions made by all participants.

Digital currencies, blockchain, and distributed ledger technology (DLT) are getting implemented in many industries such as government, banking and finance, retail etc.


Bitcoin (BTC) is the largest cryptocurrency in the world. It has been used by millions of investors and people to send and receive transactions. At the same time, this is also the cryptocurrency with the largest liquidity in the market. Therefore, this is one of the best options for investors that want to get access to cryptocurrency derivatives and gain exposure to virtual currencies. 

But there are many other cryptocurrencies in the market. Indeed, the number continues to grow every single day. However, the ones that have the largest liquidity are usually the best to trade. These coins include Bitcoin, Litecoin (LTC), Ethereum (ETH), Binance Coin (BNB), Cardano (ADA), Solana (SOL) and others. 

Another important thing that you should know is that the cryptocurrency market is very volatile. The price of the largest cryptocurrencies could fluctuate a lot in just a few minutes. Therefore, if you are using crypto derivatives, make sure that you take the necessary actions to reduce your risk and mitigate it. 

What are Derivatives?

Financial derivatives are financial contracts that derive their value from the price of an underlying asset. They include futures, options, swaps, and forwards.

They can be used by investors and speculators to manage investments in both traditional and alternative assets, or for sophisticated risk management needs. Derivatives allow investors or speculators to profit from market fluctuations in a way that is cheaper than owning the underlying asset directly.

Derivatives are a key part of financial market infrastructure. Their trade is necessary for the efficient functioning of the world’s financial markets. This is because they help smooth out price fluctuations, which otherwise would lead to vastly different prices for identical assets, affecting the creditworthiness and value of the underlying asset. This in turn affects the value of all related assets and liabilities, as well as interest rates and exchange rates.

Market participants use derivatives to mitigate risk, control speculation, or reduce volatility. For example, a futures contract may be used to hedge against price changes of an underlying asset. A swap allows an entity to receive valuable benefits without bearing the full cost or risk of such benefits.

When derivatives were first introduced in the late 19th century, they were highly controversial. Today, most kinds of financial derivatives are traded over-the-counter (OTC), and most traded derivatives have become standardized over time. In this way, the risk underlying their use is exposed to greater scrutiny with each transaction.

What are Cryptocurrency Derivatives?

A cryptocurrency derivative is an instrument that derives its value from one or more cryptocurrencies.  It implies that the value of the instrument is tied to the price of cryptocurrencies at some point in time. These instruments are also referred to as virtual currency futures.

Derivatives are nothing new, but they have gained widespread popularity and attention with digital currencies like Bitcoin and Ethereum becoming increasingly popular. These digital currencies have increased the trading volume of digital currency derivatives significantly, especially in simplified futures contracts on Bitcoin exchange markets.

According to the U.S. Commodity Futures Trading Commission, “A cryptocurrency is a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets.”

Derivatives are defined as financial instruments that derive their value from the price of an underlying instrument. These include futures, forwards, swaps and options. Derivatives are traded in markets with pre-determined rules that govern how the derivative is priced and settled. These markets allow investors to make leveraged bets on the future prices of a commodity or asset without having to purchase it directly.

Investors are often interested in trading cryptocurrency futures because they offer several advantages. These include:

Reduced volatility

The underlying assets of these instruments can be highly volatile, often experiencing wild price swings between very high highs and very low lows. The leverage offered by trading derivatives allows investors to control the market exposure of the underlying instrument while limiting the amount they need to invest upfront. This reduces the amount of capital that investors need to risk on an investment, which can help limit losses during sudden pullbacks or crashes.

Increased liquidity

Cryptocurrency derivatives are, in essence, a new market that is still in its infancy. As such, not many financial products linked to these assets exist. Some investors prefer to wait for the market to mature before entering it. Others want to actively trade these instruments in the short term but do not have the funding necessary to take direct ownership of cryptocurrencies. This makes derivatives an attractive option that can help level the playing field for novice investors while still offering experienced traders access to leveraged markets.

Increased flexibility

One of the biggest benefits of trading derivatives is that they are available for a wide variety of underlying assets, including cryptocurrencies. Derivatives allow investors to leverage their positions beyond what is possible in a given market. These instruments also offer investors the opportunity to become involved in multiple markets at once and hedge their investments by trading in different instruments with different risk profiles.

Cryptocurrency derivatives markets are still evolving, but they have grown considerably in recent months. Thanks to this growth and expansion, they are allowing investors to get unique access to new and renewed strategies that they can implement while trading in the market. 

How to Use Cryptocurrency Derivatives?

It is now time to understand how to use cryptocurrency derivatives. This is very important as it would let us get detailed information on how we can combine derivatives with our daily trading operations and strategies. 

Cryptocurrency derivatives can be used as most other derivatives in different markets. It is up to the person to decide how they use them and what they can do with them. Basically, if you want to use a cryptocurrency derivative, you will be able to do so by signing a contract to sell or buy an underlying asset. 

In addition to it, there will be information about the price and time at which the asset should be transacted. Therefore, we see that the contract has no value, but instead, it has value thanks to the fact that they follow an underlying asset that gives them value. 

But which are some of the types of cryptocurrency derivatives that we can find in the market? 

Cryptocurrency futures, cryptocurrency options and perpetual cryptocurrency contracts. These three types of derivatives are the most common ones, but users might be able to find other types of crypto derivatives on different platforms. 

Cryptocurrency futures are usually some of the most popular contracts for cryptocurrencies. These contracts are agreements between buyers and sellers to sell as specific crypto in the future. It is worth pointing out that there is a specific date and amount that have to be paid. 

It is usually very positive to use the future as they can tell us what to expect about the market in the coming days, months or years (depending on the duration of the contract). It is also worth taking into consideration that these contracts will be settled in different currencies or digital assets depending on the contract agreement between these parties. 

When it comes to cryptocurrency options, you can select between call and puts. Call options make reference to purchases of an asset that will be settled on a specific date. These options are basically an option to buy an asset at a given date.

Instead, put options would be the possibility to sell an asset on a given date. This happens in the cryptocurrency market and with different digital assets. Investors will have the possibility to decide which type of options they execute. 

Finally, perpetual contracts are also very popular in the cryptocurrency industry. They allow investors to buy and sell an asset for the market price without an expiry date. They are very popular as investors can hold these positions as long as they want. However, they need to pay a fee in order to keep their positions open for a long time. Additionally, investors need “margin,” which refers to funds that users need to have in order to avoid being liquidated. 

Are Cryptocurrency Derivatives profitable?

This is a relative question that will highly depend on the type of trader that you are and the way in which investors manage their risk. One thing is clear, cryptocurrency derivatives can be highly profitable. Does it mean that they are going to be profitable 100% of the time? No, it does not mean that. 

Indeed, trading derivatives has risks attached. Therefore, this is not a risk-free way to invest in digital currencies. However, they can be a great way to manage risk and reduce your exposure to risk positions as well. 

Thanks to their large volume over the last years, cryptocurrency derivatives are now some of the best ways to trade digital currencies. But be careful. Trading perpetual contracts in the cryptocurrency market using leverage could be definitely not a good thing to do if you use a large borrowed amount. Usually using more than 5x leverage increases the risk exponentially for traders, despite the possibility of having a large return.


Cryptocurrency derivatives are here to stay. They are among the best options for traders to manage digital currencies. Thanks to the expansion of the cryptocurrency market, crypto derivatives became a standard solution offered by trading platforms all over the world. Furthermore, thanks to the solutions that they offer, the crypto market became more mature and more advanced for professional traders.

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