After the ICO, IEO fever in the past, recently, the community Crypto is welcoming a new trend that is Derivatives Cryptocurrency. So what is this new trend and what are the benefits and risks of this form? Let's find out with T_REX through the article below.
What is Cryptocurrency Derivatives?
First, to make it more accessible, let's find the definition of "Derivative" of traditional assets. A derivative, in essence, is an asset class that inherits value from an original asset while at the same time having no intrinsic value in itself.
The most common types of derivatives are: Futures Contract (Futures), Option Contract (Options), Swap Contract (Swap). Each of these contract types has different detailed regulations and if there is an opportunity T_REX will continue to have more in-depth articles.
Why Crypto Derivatives? What are the benefits of derivatives?
Firstly, The most important application of derivatives is risk reduction. To make it easier to imagine, we will analyze a funny example below:
Mr. CZ, a business man who needs a large amount of cryptocurrency (namely Bitcoin) to run the business. However, the nature Bitcoin is volatile and volatile. Many times today you can buy a good price of 7 or 8,000 USD, but next month may have to buy one BTC for $10,000 or $20,000.
Thus, the operating costs of Mr. CZ's business will be significantly increased in the future.
To solve the above problem, Mr. CZ will buy a quantity of BTC in the future for $ 7,000 right now for it to be sturdy, not having to think much. Thanks to that, CZ can also proactively estimate costs for the company.
Of course, there will be cases of buying $7,000 this month, next month BTC If it drops to $6,000, CZ will lose. Even so, CZ only loses if you look at it BTC is an investment tool, but from the point of view of hedging, Mr. CZ has benefited from being proactive in costs by using Derivatives.
Second, Derivatives help stabilize the market. First of all, with the high leverage that exchanges provide, many traders will place orders in two directions to take full advantage of the knife market movement.
In addition, the overnight fee on many exchanges is quite high, the risk of leverage is large, few traders want to place an order for too long. This also contributes to the Bitcoin price having two-way movement with the buying force (long) pushing the price up and the selling force (short) pulling the price down, helping this coin. knife moves around a price and is less volatile.
Besides, the closing price of the futures contract and the spot trading price will often tend to be close to each other, which also helps BTC have a price index, a place to trade. anchor beans, making Bitcoin less volatile than a period dominated by regular spot orders.
As we can see, in case the futures price is higher than the spot price in the left figure, the market will tend to pull these two prices closer to each other as the expiration date approaches. The same goes for the case on the right.
With that basis, the Derivative price (symbolizing people's belief in the future) will be closer to the Spot price (the current "price" level), helping Bitcoin no longer fluctuate as before. derivative instruments flourished.
TuesdayDerivatives are tools that predict future prices. On derivatives exchanges, there will usually be Open Interest and Funding Interest indexes. In a word, these indicators indicate more long (buy) or short (sell) orders.
With such indicators providing an overview of market sentiment, you will have more tools to predict the direction and trend of the price in the future.
What are the risks of crypto derivatives?
The first, That is high leverage. Of course, if you adjust the leverage to high, you will have the opportunity to make big profits. But besides that, if the market goes against our prediction, the loss we have to suffer is equally large.
In addition, trading fees are also calculated based on your leverage ratio. The higher the leverage you play, the higher the transaction fee will be multiplied by the corresponding leverage factor.
Second, That is manipulation on trading platforms. Surely some of you have heard the term "kill long" or "kill short".
When there are "long" orders with a large amount, but waiting at a low price, the market will be stagnant and almost unchanged.
At this time, there will be a huge amount of money making strong selling, breaking through the price zone where there is a waiting "long" order and liquidating these orders until those who are expecting to "catch the bottom" cannot. struggling and will have to exit the order.
After that, the market will quickly return to the old price level as if nothing happened. That's a kill long and the same goes the opposite way of a kill short.
Each kill like that will help the market return to an active trading state and there is a theory that exchanges or trading platforms are the beneficiaries and behind pulling the strings for this. However, these theories do not have concrete evidence to support them.
Final, That is the complexity in the nature of the value as well as the mechanism of the type of derivative you want to participate in. You need to find out carefully after the expiration of the contract, what is the asset you hold, is it BTC or USDT, as contracts will have different handover terms.
It must also be emphasized again, that the value of the derivative asset is inherited from the original asset and can be considered a participant's "belief" about the future price, so fluctuations are bound to happen. Yes.
Recently also appeared some more leveraged tokens such as BULL, BEAR of FTX anchor prices on digital assets like Bitcoin or ETH… So if you want to participate, you should also consider carefully understanding the nature.
So T_REX has introduced you to a brief overview of what crypto derivatives are, the benefits and risks. If you want to join the market, you can read about current popular platforms like Binance Futures, FTX, Snapex….