Crypto-currency trading stands in direct contrast to the approach of the traditional trading world. While brokers and firms are the middlemen you may have to go through to trade in the various world markets, crypto trading has put the power back into the hands of the people.
“For all the things crypto trading has gotten right in the few years of the existence of cryptocurrency markets, there are many areas that leave a lot to be desired. One important aspect of crypto trading that only of late has begun to be talked about is a lack of choices in the trading instruments. It would be unfair to say that there are no choices, but compared to a trader in traditional markets, a crypto trader enjoys far less freedom in terms of what he can trade and how he can trade it,” said Murali Thakur, co-founder and CTO at IDAP Global.
A financial derivative can be defined as a contract between two or more parties (buyers and sellers) whose value is based on an underlying asset agreed upon by the parties involved. Consider cryptocurrency coins or tokens and you can have derivatives that use them as the underlying asset. This gives rise to some very exciting possibilities.
“To simplify what is involved while trading an asset (or to use the more general and finance-specific term, a financial instrument) it may be said that a trader either bets on a price increase or a price decrease for the asset in a given time frame. Saying the price will rise is taking a long position and its opposite is taking a short position. Currently, the most popular form of trading in cryptocurrencies is buying a coin/token for a lower value than you sell it for to make a profit. Margin lending is one way to short cryptos; you borrow money at an interest from a lender and sell coins when the price is high, then buy them back when the price is down, return the borrowed amount plus interest and keep the profit. Now, there may be many who would not want to go for margin lending and still would want to have the option of shorting cryptos while also going long on another trade, so that they are able to hedge their portfolios. This is where derivatives come in and just like since their introduction in the 1970s have gone on to change the traditional markets, their introduction into the crypto trading landscape will transform the digital currency markets forever,” he further added.
At the moment, Bitmex is one of the crypto exchanges that offer crypto-based derivatives products in form of Bitcoin Futures. A futures contract lets a buyer speculate whether the price of the asset, in this case, Bitcoin, will go up or down after say a month. The seller will be taking the opposing position to that of the buyer. After the month is up (referred to as the contract being expired) one party would be in profit and the other in loss, but if they would have taken opposing positions in other trades, i.e., going short with the futures and long with the price of BTC, then after a month, both would have been able to hedge portfolios and ensured some protection against a total loss. That is the power of derivatives.
Traditional markets offer derivatives of multiple varieties and for almost any asset. The derivatives market is probably the largest in the world, with a total worth of trillions of dollars. In the case of cryptos, it is still an untapped territory, although new ventures are coming up everyday that are trying to diversify product offerings for crypto audiences. idap.io, a global crypto derivatives exchange with fiat deposits enabled is the first complete trading platform in this sector. It is bringing not just futures, but also spreads, butterflies and indices, thus introducing a wide variety of crypto derivative trading instruments. Moreover, these offering will be not just for BTC or ETH, but for major coins & tokens with plans to include more significant cryptos to the list as time passes. On top of that, it is also providing a complete ecosystem to foster proficient trading and inclusion for different grades of traders. There are other projects tapping into crypto derivatives, although none seems as far along as idap.io, due to launch by the fourth quarter this year.
Derivatives for crypto will give institutional investors to explore this nascent market as they will be able to get exposure without needing to own any cryptos. This way, traditional traders who are adept at trading derivatives will be able to trade cryptocurrencies. As for the traders already in the market, they will get a better opportunity to hedge and speculate. More so, with the wide variety of instruments, a platform like idap.io is offering, better risk management and higher profit potential will be possible.
An unconsolidated daily BTC derivatives market is roughly half the size of the total BTC traded every day. Given the size of the traditional derivatives market compared to the spot volumes, the crypto derivatives sector is a potential goldmine easily worth many billions of dollars. Additionally, a derivatives market will bring in more traders to the pool of participants involved with cryptocurrency and thus lead to more adoption, especially from those currently not willing to engage with digital currencies.