Crypto Derivatives
Crypto Derivatives Overview
- What do we mean by Crypto Derivatives?
Derivatives are financial contracts that derive their value from an underlying asset or group of assets. In the context of cryptocurrency, derivatives allow for trading without actually owning the underlying asset. This makes them useful for speculating on price movements, providing leverage to holdings, and hedging positions.
Perpetual swaps are derivatives that let you buy or sell the value of an underlying asset. They are similar to futures contracts, but without an expiration date. This feature, combined with their cost-effectiveness and liquidity, has made them popular in the crypto market. However, the mechanics of funding rate payments can work against popular trades and there's a risk of asset liquidation with small market movements.
Options give traders the right but not the obligation to trade an asset at a predetermined price at a date in the future. The advantages of options include limited downside, flexibility of payoff structure, and execution choices. The downside is that they can be complex and have an expiration date, requiring a closing trade or the option expires worthless.
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