Crypto Derivative Markets vs. Crypto Spot Markets

A Bitcoin spot market allows traders to buy and sell Bitcoins at any moment, but there are certain restrictions. For instance, investors may only profit if the price of Bitcoin rises. Anyone holding BTC will lose money if the price falls. Even those who were fortunate enough to sell before a substantial drop and want to repurchase at a lesser price need prices to rise again. If they don’t, there’s no way to make money. Another feature of spot markets is that they compel traders to keep the assets they want to speculate on in their possession.

A Bitcoin derivative, on the other hand, allows consumers to trade contracts that track the price of Bitcoin without ever having to hold any of the cryptocurrency.

Crypto Derivative Market

Understanding Crypto Derivatives

Normal Example

Assume you want to make a profit by speculating on oil prices. You may go out and buy oil barrels in person and then sell them later when the price has risen. Of course, this is impractical and expensive, given the need for storage and shipping. Instead, trading an instrument or contract whose price is linked to the price of oil would be a far better option.

Crypto Derivative Markets

Let’s imagine the price of Bitcoin is $10,000, and you can guarantee it will climb. It will go down, your counterparty predicts. The opposing trader will pay you $1,000 if the price climbs to $11,000 by the time you settle the contract. You will have to pay $1,000 if the price rises to $9,000. As you can see, a trader or investor may profit from such a deal or contract even when prices fall, without ever having to own the underlying asset.

Though this is a general description of how bitcoin derivatives function in the context of trading, the truth is that they come in a variety of different forms.

What are Bitcoin Futures?

A Bitcoin future is essentially a contract or agreement between two parties to buy and sell BTC at a certain price on a set date in the future (hence the name). Neither side, in this situation, is needed to hold the underlying asset, which is Bitcoin. Instead, they just settle the deal in US dollars or any other currency that has been agreed upon. The precise settlement date separates futures contracts from other crypto-derivative products.

How to Invest in Bitcoin Futures?

The period of the contract is one of the first decisions a trader must make. Weekly, bi-weekly, quarterly, and other possibilities are available on crypto derivative markets. Let’s say you wish to trade weekly BTC contracts for $10,000, and each contract is worth $1 BTC. This indicates that 10,000 contracts are required to open a position worth 1 BTC. At this moment, a trader can either go long (bet that the price will rise) or short (bet that the price will fall) (bet that the price will decrease). When you open a position in whichever way you like, the exchange platform effectively matches you with someone traveling in the opposite direction. When the contracts are due to be settled a week later, one of the traders will have to pay the other. You make a profit if you choose to go short and the price moves down a week later. If the price has risen, you have lost money.

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