How To Trade In The Bitcoin Derivatives Market?

Most exchanges such as Bityard also trade derivative contracts. The knowledge required to participate in this market effectively is far more advanced. However, the sophistication of this financial instrument allows more flexibility and control when trading.

What are Derivatives?

Experts have defined derivatives as financial products, which can be contracts or securities, which depend on other assets to have their own value. That is, without any cash flow or other assets, the derivative is worthless.

The most common basic assets from which derivatives are recognized are currencies, bonds and commodities. However, the value of derivatives is not only tied to the elements mentioned above, because derivatives can derive value from all existing assets.

Derivatives tend to be used for good or for bad. They can be used as speculative tools to ensure economic growth, and can also cripple the financial system.

By themselves, derivatives have no value. Their value is derived from the estimated price movements of the assets in play.

Types of Derivatives

Derivatives have four main forms, namely: options, forward, swaps, and futures.

1. Options
These contracts allow the buyer or seller to make transactions with a specific asset at a predetermined price while working with a specific timeline. Traders are not mandated to buy assets according to contracts, which is the clear difference between options and futures contracts.

2. Forward
Forward is a contract that can be customized to suit the needs of the trader. This is usually done on an over-the-counter (OTC) exchange. Risk factors must also be considered.

3. Swap
A swap occurs between two parties who are united solely to make a profit by planning the exchange of cash flows at a specified time in the future. The assets that are usually exchanged are bonds, notes, or loans.

4. Futures
This contract requires the trader to buy or sell an asset at a predetermined date and price.

Use of Derivatives in Crypto Trading

As cryptocurrency’s fame continues to spread relentlessly, traders are constantly finding favorable price fluctuations and trying to make the most of them.

With the introduction of Bitcoin and altcoin futures, traders gained new tools they could use to reduce risk by simply signing contracts.

Traders see it as an opportunity to make a profit simply by identifying a cryptocurrency with a low price and buying it to sell it when its price goes up on Bityard . It is worth noting that this strategy is very risky, and if it must be used, it will only be played during an uptrend.

Traders have another strategy that is used to make profits which is called shorting. This is useful even when the market is trending down. This strategy involves borrowing assets from third parties such as brokers or exchanges and selling them when they believe their price will fall.

When the price finally drops, the trader buys the same amount of asset again, but this time at a lower price, and as the price fluctuates, they make a profit. In return, the broker or exchange receives a commission.

Spot Market vs Derivative Market

A spot BTC market allows traders to buy and sell Bitcoin at any time, but it also comes with certain limitations.

For example, investors can only make money when the Bitcoin price goes up. If the price drops, whoever holds BTC will lose at Bityard.

Even those who were lucky enough to sell before the significant drop and intend to buy back lower, need prices to bounce back. If not, then there’s no way to make a profit.

Another characteristic of the spot market is that they force traders to hold assets they wish to speculate on. Bitcoin derivatives, on the other hand, can allow people to trade contracts that follow Bitcoin’s price without actually owning any Bitcoin. Then what about the Bitcoin derivatives market?

How to Trade the Bitcoin Derivatives Market

This example is best illustrated with a physical asset. Imagine that you want to speculate on the price of oil. You can literally go and physically buy barrels of oil and sell it when the price goes up.

Of course, this is impractical and expensive because you also have to consider storage and transportation costs. A much better approach is to trade instruments or contracts whose prices are tied to the price of oil.

This contract is an agreement that you sign with the counterparty. Let’s go back to BTC and imagine you believe the price will go up while other people believe the price will go down.

You and the other speculator can sign an agreement stating that after a certain period of time, after the price has moved in any direction, one party will have to pay the difference in the price of the other.

For example, say the price of BTC on Bityard is $ 10,000 and you believe it will go up. Your partner’s bet will drop. If the price moves to $ 11,000 by the time you complete the contract, the opposing trader will pay you $ 1,000.

If the price moves to $ 9,000, you will have to pay $ 1,000. As you can see, through such a deal or contract, a trader or investor can make money even when the price drops without necessarily owning the underlying asset.

While this is roughly how derivatives work in a trading context, the truth is they come in lots of unique variations. The most popular derivatives in the cryptocurrency industry are futures contracts.

Disadvantages of Trading Crypto Derivatives

The ups and downs of prices can occur at any time without prior warning, which makes the crypto economy one of the biggest risks for investors.

Being an uncontrolled market, crypto traders with little or no experience have the greatest chance of losing their investment.

In addition, the unpredictable nature of crypto’s declining price can amplify the possibility of damage. This is why a full understanding of the trading platform and all of its features is a must.

Users should complete all tutorials and arm themselves with a solid strategy before starting crypto derivatives trading.