Things You Need to Know about Cryptocurrency Derivatives (CDs) Trading

In order to facilitate growth in Decentralized Finance and cryptocurrency trading, various DeFi platforms have introduced different services and products. Crypto derivatives (CDs) have grown to be one of the most popular developments in the DeFi ecosystem. Especially ever since Bitcoin futures (the most popular crypto derivative today) was launched, there has been a growing interest in crypto derivatives trading.

What then are crypto derivatives and why have they become the new rave in decentralized finance?

What is Cryptocurrency Derivatives Trading?

The concept of derivatives trading is not new to the general financial market and investments sector. Derivatives trading in a general sense, is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, index or security to trade at a specific price and at a specific date.

CDs trading follow the same pattern with the primary intent of protecting the trader from price fluctuations. In this case, parties agree on a contract speculating cryptocurrency prices at a specific date in the future. The parties are thus required to trade at the agreed price on the date of contract execution. The trade takes place irrespective of the market price (risen or fallen) on the date of execution.

One of the primary intents behind CDs trading is to help the trader reduce risk, not necessarily to only make profit. It is some sort of protection against the volatility of assets and price fluctuations.

As of May 2020, crypto derivatives trading volume had reached a record of US$602 billion, a 32% growth. According to data from Cryptocompare, CME’s ETH futures reached a US$1 billion trading volume in February 2021. This evidently mirrors the unprecedented growing interest by traders due to the benefits accrued to derivatives trading.

Types of Crypto Derivatives

Futures

This is one of the most popular forms of derivatives in the DeFi market. It allows traders to buy and sell an asset on a specific future date at a fixed price regardless of the market prices. Futures are generally considered safer and more reliable and are usually traded on exchanges. Traders generally trade futures to hedge against investment risks of trading in a volatile crypto market.

Synthetic Assets

This is a fairly new type of derivative. They are simply referred to as digital representations of derivatives. In other words, they are tokenized derivatives. These assets are easily accessible and can be created by anyone on platforms like Ethereum. Examples of synthetic assets existing today include Universal Market Access (UMA), Synthetix and a host of others.

Options

This is another form of derivative, although quite similar to futures. With options, the traders (i.e. buyers and sellers) agree on a specific price for an asset to be bought and sold at a specific date. However, the difference here is that the buyer has no obligation to buy the asset on the particular date. There are typically two types of option contracts: call option (where traders agree to buy an asset at a price and specific date); and a put option (traders agree to sell an asset at a price and specific date).

Forwards

These are typically the same as futures however, with a significant difference. Forwards are traded on over-the-counter exchanges and not on centralized exchanges. This makes them a lot riskier and requires caution on the side of the trader.

Perpetuals

Perpetuals are also similar to futures in the sense that traders either long or short positions based on the predicted future price of the underlying asset. However, one key way they differ from futures is that perpetuals don’t have a settlement or expiration date. They can be held indefinitely. One of the reasons perpetuals appear to be more suitable for investors looking to take long positions is that they typically experience lower price volatility relative to the underlying asset’s price movements. It has grown to become one of the most popular and versatile forms of derivatives today in the DeFi market.

CDzExchange aims to facilitate perpetual derivatives trading on a decentralized scale considering the growing interest in this form of derivatives. The platform aims to add other CDs in the long term.

Derivatives Trading: A Better Way to Go

Crypto derivatives trading provide better opportunities to the trader and help to facilitate growth in the DeFi ecosystem. With a number of benefits like low execution fees, hedging opportunity, protection from volatility and possibility of higher liquidity given the growing interest, derivatives trading offers more incentives to traders. However, it is important that traders familiarize themselves adequately of the various risks involved and necessary terms before trading.

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Cross-chain Crypto Derivatives Exchange

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