What are crypto derivatives? The word derivative implies that it is derived from something. Crypto derivatives, therefore, derive their value from cryptocurrencies. They exist as financial contracts that two parties enter into to speculate on the underlying cryptocurrency’s price on a future date.
Let’s dive into derivatives and learn what exactly is perpetual and futures contract!
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Links Mentioned:
Explore crypto exchanges – https://www.coingecko.com/en/exchanges
Timestamps:
0:00 – Intro
0:27 – What are crypto derivatives?
1:52 – What are futures?
3:59 – What are perpetual contracts?
5:06 – Leverage opportunities
7:15 – Closing thoughts
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#Derivatives #Perpetual #Futures #Options #Swaps #crypto #DeFi
Did you know that there are ways to invest in Bitcoin without holding actual Bitcoin? This is made possible through financial instruments like derivatives. So what are crypto derivatives? Well, that is what we are going to find out shortly including some of the types of crypto derivatives like Futures and perpetual contracts.
Make sure to stick around to find out how they work and how they differ through simple explanations and practical examples. Let’s get to it. So, what are crypto derivatives? Ok, the word derivative implies that it is derived from something, right?
In financial terms, derivatives are instruments that derive their value from an underlying asset. Crypto derivatives therefore derive their value from cryptocurrencies.They exist as financial contracts that two parties enter into to speculate on the underlying cryptocurrency’s price on a future date. So for example, a Futures contract, which is a type of crypto derivative,
Will have the parties agree on a selling and buying price of the cryptocurrency in say one month, regardless of what the actual price will be. Fast forward to a month later, the buyer may profit if the price of the underlying
Cryptocurrency went up and is now higher than the agreed price in the contract. And if the price of the underlying cryptocurrency goes down and lies below the agreed price, the seller will make a profit because the buyer will be purchasing the asset at a higher price than the actual market price.
Don’t worry, we’ll look at actual examples shortly when we take a closer look at the types of crypto derivatives. Some of these types include options, swaps, Futures and perpetual contracts. Though for this video, we’re going to focus on the last two. These derivatives generally differ depending on the conditions in
The contract as you’ll see shortly. Let’s start with Futures, what is it? As the name suggests, it is a legal agreement between two parties to buy or sell an asset at a set price in the future. So before the parties get into the contract they generally agree on two things.
One is the price at which they will exchange the asset in future and two is the expiration date of the contract which is simply the date the contract will be closed and settled. Ok let’s now find out how crypto Futures work through a practical example Say we have two crypto derivative traders,
Mercy and Frank who enter into a futures contract when the price of Bitcoin is $30,000. Mercy is bullish on Bitcoin and she is confident that it will surpass $30,000 in a month which is the expiration date of the contract. This means that she will have to pay the $30,000
For 1BTC regardless of BTC’s price in a month. Frank on the other hand is bearish on BTC and has his reasons to believe that the price of BTC will drop below $30,000 in the coming month. So the contract from Frank’s perspective,
Commits him to selling BTC at the agreed price, regardless of the asset’s price in a month. Alright, let’s look at different scenarios that’ll determine which of the two makes a profit. Scenario 1 It could be that Mercy
Was right and the price of Bitcoin does go up to say, $37,000. So now she’ll actually be purchasing BTC from Frank at a discount. In this case, she’ll make a profit of $7,000 without factoring in fees. Scenario 2 Let’s assume Mercy’s prediction was wrong
And the price of BTC went down and is now trading at $25,000. She’ll still have to buy the BTC from Frank at the agreed $30000 meaning she makes a $5000 loss while Frank makes a $5000 profit. There’s still some nuances to Futures but that is generally how it works. What about Perpetual Contracts?
Perpetual contracts are more or less similar to futures but with a distinct difference, they have no expiration date. So investors can hold their positions however long they like. For this reason, perpetual contracts have price pegs to ensure that they are traded at prices that are equal or almost equal to the
Spot market prices. This price peg is maintained through a premium called a funding payment that is paid between the contract sellers and buyers to help keep the price in line with the spot market. Let’s find out how Perpetual contracts work. Say that Mercy decides to invest in perpetual contracts this time
When the price of Bitcoin is around $30,000. Since she predicts that the price of Bitcoin may go up, she decides to purchase a perpetual contract at $30,000. After two months, the price of Bitcoin does indeed go up to
Around $40,000. So Mercy, who is happy with the $10,000 profit, decides to close her position. Another thing about crypto derivatives like Futures and perpetual contracts, is that they offer leverage opportunities. This simply means that it allows you to open a trading position that is bigger than your trading capital.
So in Mercy’s case, if a derivative exchange offers 2x leverage, it means that her capital will now double and so will her profit. However, just as leverage amplifies profits, it also amplifies losses so there is a very high risk of being liquidated. Let’s quickly see how this may happen in Mercy’s case.
But before that, let’s try to break down the following concepts first, that is the initial margin and the maintenance margin. The former describes the minimum value that needs to be paid to open a leveraged position. For illustration purposes, let’s set this value at $30,000. Meaning Mercy pays an initial margin of $30,000,
Which will act as her collateral. to open a 2x leveraged position. The maintenance margin, on the other hand, is the minimum amount of collateral Mercy must hold to keep her trading positions open. If Bitcoin’s prices move against Mercy and her margin balance
Drops below this level, she may be asked to add more funds to her account or be liquidated. That said, perpetuals are by far the most traded financial instruments in crypto. At the time of making this video, the 24 hour volume of perpetuals was over $126 billion compared to Futures’ $5billion.
Though, you might still wonder, why not just hold actual Bitcoin if the price is pegged to it anyway? Well, these derivatives have an important function in crypto of managing risks. Say Mercy holds actual Bitcoin but its price is going down. Since she is also a crypto
Derivatives trader, she can decide to purchase a derivative contract whose value swings in the opposite direction of the BTC she holds. Ideally, now she’ll be able to offset the losses of her actual BTC with the gains from the derivatives. All in all, this collaboration between crypto
And traditional financial instruments is a major step forward for digital assets in general. Also, it gives investors an option to be involved with digital assets without necessarily holding them. So, are you going to experiment with crypto derivatives or are you gonna stick with the good
Old Holding On for Dear Life tactic? We’d love to hear your thoughts so let us know in the comments. Remember to like, subscribe and follow us on all our socials for future alpha! See ya!
32 Comments
Gracias
Thanks for the explanation.
and what about hold and become a liquidity provider for a perpetual protocol?
well put together and informative
Yeah hold on until SBF will liquidate it hahaha
Efficient video basic explanation of perpetuals. Thank you 🙏
Lovely
Pro tip: If you can't trade succesfully over time at 1x, adding leverage will only increase the rate at which you lose money.
🌤11AM Dec 18th 2022
Here is where you can tell the creators of this video are noobs. Understanding that someone else takes the opposite side of your trade, she forgot to mention it could be another trader or the exchange
Im no financial expert, but your description of a future (a subject for which I know nothing about) sounds a lot like a simple options contract. If thats not true then what is the difference? Im assuming that, like options, there are conditions for which a contract can expire null and neither party is forced to buy and sell. If that is not true then why wait a month; why not just buy immediately and hold for your prediction to come true?
!
I like the way she explains crypto. 👍
great vid!
Nyc and very informative
Excellent 👍
My lady me being newby trader i have watched thousands of trading vids and quite honestly i never enjoyed them like i enjoyed your lovely explanation 😊
Derivatives are scam
I am working on getting into the perpetuals. I have been spot trading! Thanks for the informative video and your time and sharing!
Why not just sell cash secured puts on stocks you want to own anyway?
good video but major lack of depth and explanations
Finally i understand it.. From a seeet smile of a good❤️heart woman 🌹
Future, derivatives complete fraud!
Having people buy paper crypto without actually holding them is not good for the crypto industry. That means people are gang and losing money without adding to the liquidity
what apps provide this in the US?
Finally i understood
I believe the saying goes you can only lose money play selling your Bitcoin
Super
Nice explanation
2:53 Frank's a dumbass
Still don’t get the perpetual
Bettwr believe imma experiment.