Crypto Derivatives: A Guide to an Evolving Market

By Raghav Sawhney

Crypto derivatives are a reasonably new entrant in the financial world but you’ll be hard-pressed to find a faster-growing market. The rise of digital assets has led to the creation of new investment opportunities, including crypto derivatives. But what are they?

Derivatives are financial instruments that derive their value from an underlying asset, such as stocks, commodities, or in this case, cryptocurrencies. In recent years, the market for crypto derivatives has exploded, offering traders and investors the ability to bet on the price movements of digital assets in new and innovative ways. Let’s delve into this newly formed industry and learn what exactly crypto derivatives are all about.

State of the Crypto Market

The crypto derivatives market has experienced rapid growth in recent years, with the total volume of trades increasing dramatically. In 2020, the total daily volume of crypto futures reached $10 billion, a significant increase from the $1 billion traded in 2018. Come April 2022, the crypto market is valued at an astonishing $3 trillion as shown on the Gate.io Crypto Exchange! This growth can be attributed to several factors, including increased institutional involvement, new products being launched, and the growing popularity of cryptocurrencies as investment assets.

Available Products

There are a variety of crypto derivatives products available for traders and investors, each with its own unique features and benefits. Here are some of the most popular products:

1. Futures Contracts: Futures contracts are agreements to buy or sell a specific asset at a set price on a future date. In the blockchain world, crypto futures contracts allow traders to bet on the future price movements of cryptocurrencies, such as Bitcoin or Ethereum. These contracts can be settled in cash or with the underlying asset.
2. Options Contracts: Options are financial instruments that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a set price. Crypto options allow traders to take a more flexible approach to their investment strategies, offering them the ability to limit their potential losses while still allowing for significant upside potential. Centralized exchanges offer a large plethora of such products, but Bitcoin options notoriously always lead the pack by volume.
3. Swaps: Swaps are agreements between two parties to exchange one asset for another, often at a future date. Crypto swaps are similar to futures contracts, but they are settled in the underlying asset, rather than cash. This allows traders to take a long or short position on the price movements of cryptocurrencies without having to physically hold the assets.
4. Exchange-Traded Funds (ETFs): ETFs are investment funds that are traded on stock exchanges, much like stocks. Crypto ETFs allow investors to gain exposure to the performance of a basket of cryptocurrencies without having to purchase the underlying assets directly. This makes it easier for investors to invest in the crypto market without having to navigate the technicalities of holding and trading individual assets.
5. CBBCs: Crypto-based Bonded Forward Contracts (CBBCs) are a new type of crypto derivative that is gaining popularity in the market. CBBCs are financial instruments that allow traders to bet on the price of a cryptocurrency in the future, but with a twist: they are backed by a physical asset or a “bond”.

This bond provides additional security for investors and reduces the risk associated with investing in crypto derivatives. CBBCs can be settled in either cash or the underlying asset, giving traders the flexibility to choose the settlement method that best fits their investment strategy. The launch of crypto CBBC has further expanded the range of investment opportunities available in the crypto derivatives market and has attracted a new wave of institutional investors.

What Does The Future Hold of Cryptocurrencies?

The market for crypto derivatives has evolved rapidly in recent years, offering traders and investors new and innovative ways to bet on the price movements of digital assets. From futures contracts and options to swaps and ETFs, the variety of products available means that there is something for everyone. Whether you’re a seasoned trader or just starting out, it’s important to educate yourself about the different products and your crypto trading platform wisely. Newcomers could choose the Gate.io crypto exchange which many investors from around the world choose for. Gate.io not only provides the live prices for 1400+ cryptocurrencies but also offers many strategies for different trading and investing.

It’s worth noting that derivatives trading may open the door to even greater financial products and we are still at the inception of it all. With this in mind, the broadness of the crypto industry never ceases to amaze, and we cannot wait to see what’s next in store.