“Crypto Derivatives: Understanding the Types, Advantages, and Market Trends”

2023-05-25 16:33:15

There are many ways to decipher market trends. From technical and fundamental analysis to social media monitoring, many metrics provide a basis for traders to gauge market sentiment and make trading decisions.

Technical analysis can become quite complicated, and fundamental analysis requires significant time to perform adequate quality research.

Cryptoderivatives can serve as a proxy for overall market sentiment. They can show where traders think the market is headed next and give traders valuable clues to consider when making trading decisions.

What are crypto derivatives?

Whether you’re trading stocks or cryptocurrencies, derivatives represent another, more complex level of trading. Basic trading is the spot trading that everyone knows.

In spot trading, we buy an asset and take possession of it immediately. For example, we buy BTC on the Binance crypto exchange. Later, we can sell BTC when its price rises and realize a nice profit from the difference between the selling and buying rates.

We find derivative trading transactions at a higher level than such spot trading. Derivative trading does not involve direct ownership of the asset. Instead, the agreement is about contracts for the price of the device. These contracts to derivative transactions also called because their value is determined based on the underlying asset. This allows traders to continue to profit from price differences in the asset without ever having to own the asset itself.

Types of derivative trading

Depending on the nature of the contract, we distinguish three main types of derivative transactions. Each type of derivative trading has its own purpose.

1. Forward contracts

These derivatives allow traders to buy or sell an asset at a specific time in the future. By doing so, traders place bets on the future price of the asset, thereby binding themselves to the outcome of the bet.

2. Perpetual futures

As the name suggests, this type of derivative is a refinement of futures trading. They also bet on the price of the asset, how much it will be at some point in the future. The difference is that perpetual futures do not have an expiration date. This allows traders to hold their contracts until they decide to close them.

3. Option trading

Options are derivatives that can hedge the future obligation to buy or sell an asset. Based on this intention, there are two options:

  • Purchase options – the trader can buy an asset at a specified price.
  • Put options – the dealer can sell an asset at a specified price.

In both cases, the trader would have the right to exit his position without obligation at a specified price – strike price – on a specified expiration date. These criteria are defined and enforced by regulated options brokers in an automated manner.

So how does this differ from previous examples?

Note that options trading allows traders to generate income by selling the “premiums” contained in options contracts. After all, they receive a premium from the buyer in advance – for example a fee – and they can keep it regardless of the drawdown.

Options are therefore about rights instead of obligations. However, it is an obligation for the option selling party if the buyer exercises the option.

Advantages of derivatives trading for traders

Why do traders choose derivatives trading over spot trading? There are three main arguments for this.

Risk management with coverage

In financial matters, those who do not build a hedge behind themselves lose in the long run. For every trading position, there is a counter position that offsets the risk of the original position. This is the essence of hedging.


Whether we like them or not, memecoins like DOGE and PEPE have certainly proven that speculation can be extremely profitable, even just for spot trading. But speculation can be taken to another level with futures contracts.

As we saw with futures, traders can enter into long and short contracts. With this liquidity, their bets in the form of contracts become as valuable as the underlying asset itself.


Speculation and leverage go hand in hand in futures trading as well. Futures derivatives are best used for leverage because these contracts have specific expiration dates. In this sense, leverage is about multiplying your stakes.

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