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What are Cryptocurrency Derivatives?
Cryptocurrency derivatives are financial instruments whose value is derived from the value of an underlying cryptocurrency.
Cryptocurrency derivatives provide an avenue for investors to bet on the price movements of cryptocurrencies without necessarily owning them.
The main types of cryptocurrency derivatives are:
Contract for Differences
These are standardized contracts to buy or sell a particular cryptocurrency at a predetermined price at a specific time in the future.
They can be cash-settled or physically-settled.
Example: The Bitcoin futures offered by the Chicago Mercantile Exchange (CME). Traders agree to buy or sell Bitcoin at a specified future date at a price set today.
An options contract gives the holder the right (but not the obligation) to buy (call option) or sell (put option) a specified amount of a cryptocurrency at a predetermined price within a specific time period.
Example: Deribit is a well-known platform for trading cryptocurrency options. They offer both call and put options on Bitcoin and Ethereum.
These are derivatives in which two parties exchange financial instruments. In the case of cryptocurrencies, these can include interest rate swaps or currency swaps.
Example: BitMEX offers Bitcoin swaps. In this case, one party might agree to pay the other the return of Bitcoin over a set period, while the other party pays a fixed interest rate.
4. Perpetual Contracts (Perpetual Swaps)
These are a type of futures contract but without a set expiry date. Investors can hold a position for as long as they want. They are typically used for trading Bitcoin.
Example: Binance offers perpetual futures contracts for a number of cryptocurrencies, including Bitcoin and Ethereum. These contracts have no expiry date.
5. Forward Contracts
Similar to futures, they are private agreements between two parties and can be customized to any cryptocurrency, amount, and delivery date.
6. Leveraged Tokens
Leveraged Tokens enable you to amplify price fluctuations without engaging in more complex trading strategies.
Example: Binance offers a range of leveraged tokens like BTCUP and BTCDOWN, which allow traders to take leveraged positions on Bitcoin's price movements without the need to manage a leveraged position.
7. Contract for Differences (CFDs)
A CFD is an agreement between a trader and their broker under which one spay the other depending on which direction the price of a cryptocurrency moves.
The amount is calculated using the "difference" between the price at the open and close of the trade.
CFD trading enables trading the value of an underlying asset rather than the asset itself.
Example: eToro is a popular platform that offers CFDs on a range of cryptocurrencies including Bitcoin, Ethereum, and Litecoin.
8. Exchange-Traded Notes (ETNs)
Cryptocurrency Exchange-Traded Notes (ETNs) are issued by a financial company and promise to pay you the profit (or loss) of the specific cryptocurrency, minus some fees, at the end of a set period.
The company issuing the ETN doesn't have to buy the actual cryptocurrency; they can invest your money however they like.
When the investment period ends, the company pays you the money you would have made (or lost) if you had invested directly in the cryptocurrency, minus some costs.
9. Prediction Markets
Prediction markets are not derivatives but they allow users to bet on the outcome of future events e.g. the price of a cryptocurrency at a future date.
Example: Augur is a decentralized prediction market platform where users can create prediction markets for virtually anything, including the future price of cryptocurrencies.