The acquisition of a crypto derivative does not imply buying a cryptocurrency but rather participating in a financial contract with an expiration date. The risks of these financial products due to the volatility of cryptocurrencies make it necessary to do good research before investing in them.
Derivatives are a force that drives cryptocurrencies to become legitimate assets. The increasing number of traders investing in the crypto derivatives market allows the liquidity of the crypto-asset markets to increase.
Crypto derivatives are financial products based on an underlying asset, for which the buyer can buy or sell a product at a predetermined price. For example, when creating a Bitcoin crypto derivative, the cryptocurrency serves as the underlying asset of that instrument.
Likewise, the negotiation of financial derivatives occurs both on the stock market and between the parties. For that reason, the products are easily tradeable while liquidity is high.
The main characteristic of those financial products is that they are a derivative of another asset. Therefore, acquiring a crypto derivative does not imply the purchase of a cryptocurrency but the participation in a financial contract.
Those contracts may, or may not, have a termination date when the parties meet the purchase and sale obligation. Crypto derivatives have caused the price of Bitcoin to rise on several occasions due to the interest that they arouse.
The Types of Crypto Derivatives that Traders Can Find
Futures are financial contracts between parties that determine a term and a price to make a sale. Those financial products are available for stock indexes, government bonds, and precious metals like gold and silver.
Options are financial products that give the buyer the right to buy shares at a predetermined price. They also have an expiration date on which it is possible to exercise that right.
Contracts for difference (CFDs) allow the investor to speculate on the rise or fall of prices. The parties decide to settle the difference in the underlying security from the moment of the agreement.
Risks that Crypto Derivatives Pose to Investors
The negative experiences of individuals and companies with financial derivatives have caused fear about the risks of those products. For that reason, it is advisable to do good research on a crypto derivative before investing in it.
The risks are high and increase with the volatility in the price of Bitcoin and other cryptocurrencies.
Counterparty risk occurs primarily with an OTC operation and has little to do with private investors. However, if the counterparty in a transaction in derivatives files for bankruptcy, the pending position will fall into the company’s assets.
Leverage increases both potential returns and risks, so users should exercise caution. Losses can go up indefinitely, but derivatives can also generate high profits.
According to Binance, crypto derivatives allow investors to diversify their portfolios and have exposure to various cryptocurrencies. They also believe that those financial products serve to protect portfolios from extreme price volatilities and unexpected risks. Likewise, they say that derivatives are essential to promote price discovery.
By Alexander Salazar
