Digital currencies continue to disrupt the economy as they gain popularity as assets for investment and as mediums of exchange in financial transactions. Crypto derivatives are a good example of products that have shown rapid growth and continue to do so. And as the crypto market continues to grow, so does the variety of products available within the cryptocurrency space.
Futures are a popular type of crypto derivative commonly used by institutional investors. Data from futures are typically used to predict future price movements and market sentiment. More specifically, Bitcoin futures are agreements between a buyer and a seller to buy and sell Bitcoin at a given price at a specific date in the future. The contract is usually settled in USD or any other currency agreed upon by both parties.The first thing a trader needs to determine when trading Bitcoin futures is the contract’s duration. Exchanges for crypto derivatives usually offer weekly, bi-weekly, quarterly options, and more.
There are multiple types of options: call and put options, as well as American and European options. Call options allow a trader to purchase an asset on a given date, while put options allow a trader to sell an asset on a given date. In addition, American options can be sold before the contract’s expiry date, whereas European options need to be sold exactly on the agreed date.
Let’s look at this example: Say you enter a call option for Bitcoin at $50,000. However, upon the agreed date, the price dropped to $40,000. You would not have to bear the $10,000 loss in an option. You can just exercise your right not to fulfill the contract. On the other hand, if at the end of the month the price has dropped to $15,000, the trader will likely choose to let the option expire so as to not incur a loss, except for the premium he initially agreed to pay to buy the contract. A perpetual contract, also called a perpetual futures contract or perpetual swap, is the most prolific type of crypto derivative, especially among day traders. In traditional finance, the equivalent of a perpetual contract would be contracted for difference .