Derivatives in Crypto

This structure includes exchange fees, which can vary widely among platforms, gas fees for decentralized platforms, and deposit and withdrawal fees. High costs can erode profits, especially for high-frequency traders, making choosing an exchange with a competitive fee structure that does not compromise other critical services imperative. While synthetic assets share similarities with stablecoins, they’re more diverse because they can represent a wide range of assets, including stocks, precious metals, altcoins, options, and futures.

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While the crypto options market continues to develop with many new exchanges and DeFi protocols entering the space, overall adoption of crypto options has been muted relative to perps. Centralized options exchanges typically trade around $30 billion in volume per month, closely rivaling the volume of decentralized perps but amounting to just 1-2% of all futures volume. Additionally, liquid options markets have failed to materialize on centralized venues for assets beyond BTC and ETH, so the breadth of listed solutions is far narrower than for perps that trade on hundreds of assets10. Complexity may contribute to the relative lack of adoption, with market participants favoring the simpler pricing dynamics of linear derivatives thus far. Another impediment may be the sheer challenge of bootstrapping liquidity into a new market that is fragmented by so many variables.

M. Margin Trading

Derivatives in Crypto

Crypto derivatives are financial instruments that derive value from an underlying crypto asset. They are contracts between two parties that allow traders to speculate on the price movements of cryptocurrencies without actually owning the underlying asset. As such, the trader makes a profit or loss depending on whether the asset price goes up or down. Evaluating volume by instrument, perpetual futures comprise the majority of all crypto trading volume (~68%), followed by spot (~28%), with much smaller contributions from other instruments like calendar futures (~3%) and options (~1%).

What are the advantages of using derivatives?

Derivatives in Crypto

The knock-out feature potentially limits profits and losses for both option holders and option sellers. If the price is at $10,000, you can open a position of 10,000 contracts to trade the equivalent of 1 BTC. If you are going long, you can hold your position for as long as you want until the price has increased to a level that you are satisfied with. Once you choose to close our position, the exchange will take care of paying you the difference between your entry price and the current market price.

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For example, if the price of the perpetual contract exceeds the index price, traders who have taken a “long” position typically pay the funding rate to compensate for the price difference. Conversely, if the perpetual futures contract price is lower than the index price, traders with a “short” position pay the funding rate. Crypto derivatives operate similarly to traditional derivatives, where a buyer and seller enter into a contract to sell an underlying asset, with the asset being sold at a predetermined time and price. This is not to be confused with the strike price (the price at which the option holder buys or sells the asset if they exercise their right to do so).

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Derivatives in Crypto

Introduction to Crypto Derivatives, Options, and Futures