crypto strategy

Crypto Derivatives – What and How to Invest

By Gaurav Dahake

Crypto is nothing new to the majority of us. The segment has been the subject of constant conversation and scrutiny over the past few years, but the extreme volatility, recent fall, and heavy government intervention have raised a wave of skepticism among investors.

Despite all the speculation, lately there has been a steady growth in the number of crypto enthusiasts. But there is a dearth of seasoned crypto traders in the Indian market. Although the high instability was a major reason, the lack of different trading products like the stock market also limited investors’ appetite for crypto. To address this challenge, exchanges are now introducing crypto futures trading.

Futures trading has been one of investors’ favorite asset streams due to its affordability and high return potential. In 2021, 29.28 billion futures contracts were traded worldwide, up from 12.13 billion in 2013, according to Statista.

The actual stock or commodity being traded is rarely traded or delivered outside of times when one trades to hedge against a price rise and takes delivery of the stock or commodity at expiration.

Futures contracts are generally paper transactions for investors only interested in speculative profit. This makes Futures an easy commodity to trade rather than holding crypto that needs to be tracked and stored somewhere (even if only as an electronic record).

What are Futures? What is Crypto Futures Trading?

In crypto, futures means agreeing to buy a particular cryptocurrency at a specific price at some point in the future, regardless of the price when the time comes. The time decided can range from less than a day to several years. This is mainly called gambling since the parties involved in the transaction mainly base their transactions on speculation on how the price of the asset will behave in the future, hence the name futures trading.

One should be aware of common futures terminology like leverage, margin requirements, funding rates, etc. Understanding futures as a concept at a basic level is imperative to start investing in crypto derivatives.

Advantages and Disadvantages of Crypto Futures Trading

Advantages

Potentially high rewards model

Today there are more than 20,000 cryptocurrencies in the world, each with its own specialty. But one thing that remains common to all of them is price volatility and constant scrutiny. Thus, investing in crypto through futures due to its unique model can offer significant returns depending on ever-changing supply and demand dynamics.

Unbeatable secure network

Blockchain is popular for its encrypted and nearly hack-proof technology that keeps your investment secure. Due to its fragmented or decentralized nature, the blockchain cannot be easily hacked from a single system, making it nearly impossible to hack.

Profitable

Owning all the crypto tokens can be very expensive. However, one can own a variety of cryptos with futures contracts without having to purchase each one individually. This can give you access to unlimited profits with relatively low investments.

The inconvenients

High volatility

Whether trading spot or investing via futures, the fundamental nature of crypto is extreme volatility. While this can act as a blessing and give your investment an instant boost, it can also torment them when the markets are down.

Risky leverage

It is very important to design a solid risk management strategy to start futures trading, which can be difficult for new enthusiasts.

Trading crypto derivatives is an easy way to speculate on the future valuation of digital assets. It can be profitable for people who have a good knowledge and risk management strategy. However, the key to successful trading of any kind is research and a robust strategy.

Conclusion

The derivatives market represents 69% of total crypto volumes, up from 66% in June 2022, and helped drive overall crypto volumes on exchanges to $4.51 trillion in July 2022, according to CryptoCompare.

Crypto derivatives have functions that go beyond an individual trader’s investment portfolio. They are part of a mature financial system and therefore play an important role in promoting the crypto industry as a familiar asset class.

The author is co-founder and CEO, Bitbns

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