Introduction to Derivatives

What are Derivatives?

Derivatives are financial instruments whose value depends on the value of the underlying asset. Unlike spot, where one actually owns the underlying asset, derivatives derive their value from its spo t price. Generally, crypto derivatives offer traders a flexible method of profiting off the price movements of digital assets without exposing them to the security risks or rechnicalities associated with storing or holding cryptocurrencies, making exchanges extremely valuable to the cryptocurrency ecosystem.

As a trader interested in betting on the price of crypto assets, you could either purchase an asset at an exchange (spot), or trade a derivative product anchored to the value of the digital asset. In the former, the process involves holding crypto assets. In other words, you are the owner of the asset, allowing you to freely move funds around to a different exchange, storing them in an offline wallet, or use the assets to make payments. Derivatives do not have this option. In contrast to spot trading, derivatives do not come with any custody requirements, making them useful to quickly buy and sell digital contracts. Derivatives can not be used to store, or transfer outside of the exchange.

Types of Derivatives

There are multiple types of derivatives that are commonly used within the financial markets

Forwards

A forward contract is a contract established between two parties to buy or sell an asset at a specified price on a future date. Forwards are over the counter (OTC) instruments, which means that they can be customized to any requirement between two parties without a structured exchange.

Futures

While fundamentally similar to forwards, a future is an agreement to buy or sell a particular financial instrument at a predetermined price at a specific date in the future. Futures are standardized and regulated with predetermined sizes and set settlement dates. Therefore, futures are traded solely through an exchange as those provide the means to enforce the mechanics and uphold them, making exchanges an integral part of the ecosystem.

Options

Options are a type of contract that gives the right but NOT the obligation to buy (call) or sell (put) a financial asset on a specific date at a pre-agreed price. Options can be traded both through an exchange or OTC.

Swaps

A swap is a derivative product that allows the exchange of one financial asset for another, based on different factors. While the underlying instrument can be any security, cash flows are commonly exchanged in swaps.

Disclaimer:

The information provided above is not financial advice but for educational and entertainment purposes. Please do your own due diligence or consult a financial advisor before investing in any digital assets.

All opinions expressed on Bitget’s Soapbox (also known as the ‘Soapbox’) are opinions of individual traders using the Bitget platform, and do not reflect the opinions of Bitget or its affiliate companies and partners. The Soapbox author’s opinions are based upon information they confirm to be reliable, but neither Bitget nor its affiliates warrant its complete accuracy, and it should not be relied upon as such.