Derivatives are an essential trading tool for any trader. They are used in both the crypto market and the traditional one. Numerous different derivatives exist. In this article, we will explore the most famous derivatives and what they are used for.
Why use derivatives
In stock exchanges, there is a division into spot trading and derivatives trading. During spot trading, a trader buys or sells an asset for a currency, for example, BTC for USD.
While trading derivatives, a trader needs to top up their account with currency. If you sign a derivative contract, part of the deposit is frozen as collateral. The collateral remains frozen until the terms of the contract are fulfilled. If the deal is successful, all funds are returned to the trader with additional profits. However, in case the transaction is failed, then the collateral is left to the platform.
In spot trading, a trader has only one way to make a profit: buy an asset and wait until its value rises in order to sell and benefit from the differential cost.
With derivatives, there is an opportunity to profit not only on the surge in the asset price but also on the drawdown. For instance, you buy an asset that is now worth $40,000 and expect its value to decline soon. To profit from the forecast a subtype of derivative will help – buying short. Alternatively, throughout spot trading, the trader is limited only to their equity. If the equity is small, then the profit will be corresponding.
Derivatives allow you to trade with leverage. Leverage allows you to borrow a portion of the funds for a deal from the exchange. For example, a leverage of 25x means that you can earn 25 times as much as you could if you are lucky. Still, there is a significant risk. If the price goes astray, there will be a corresponding loss.
Types of derivatives
As we mentioned earlier, there are a large number of derivatives. In the crypto market, there are five types: perpetual contracts, futures, exchange-traded index funds (ETFs), swaps, and stock options.
Perpetual futures contracts
When a trader creates perpetual contracts, he predicts a certain asset value in the future. If the forecast is confirmed, then from the differential cost between the opening and closing of the contract a profit will be made. You can make money on both the rise and fall of the exchange rate. The trader can decide when to close the contract – that’s why they are called perpetual futures.
Futures contracts
Futures contracts differ from perpetual contracts by the fact that they must be closed by a certain date. As an illustration, a trader commits to buying 1 BTC for $40000 by the end of the ongoing quarter. One of the popular futures types on the crypto market is inverse, where trading is not in stablecoins, but in cryptocurrencies.
ETF
Cryptocurrency exchange traded funds theoretically work just like any other ETF. While most ETFs track a stock index or stock basket, a cryptocurrency ETF tracks only one or a few digital tokens.
Stock options
Options are much like futures, except with some differences. An option is a financial contract between the holder and the seller. The holder receives the right (not the obligation) to buy or sell a certain quantity of the underlying asset at the strike price on a certain date (the expiration date).
The seller agrees to buy or sell the asset whenever the option holder requests it. When a contract is purchased, the holder pays the seller a certain amount of money, the so-called premium.
The rights and obligations of the holder and the seller are substantially distinct. The former has the right to choose whether to exercise the option or not. The latter is obliged to fulfill the terms of the contract when requested by the holder.
Conclusion
Derivatives are outstanding financial tools for making profits. Nevertheless, before you start trading with them, you should familiarize yourself with everything and choose the derivative that is perfect for you. They give the trader 2 privileges:
- Earnings are made not only when the asset price grows, but also when it falls;
- Trading with leverage offers the chance to maximize income, yet it also exposes you to higher risks.
But in order to start earning cryptocurrency today, we suggest using RevenueBOT, a platform for creating trading bots. You can use RevenueBOT to create a stable passive income. The platform allows you to create trading bots on the largest and top cryptocurrency exchanges such as: Binance, Bittrex, FTX, OKX and others. The creation of the bot is completely free, the commission fee will be charged by the platform only after the first profit has been made. It should be noted right away that the bot does not have access to the user’s funds on the exchange, and that it trades using API-keys, which means that the exchange account will remain inaccessible. RevenueBot has over 40,000 customers, who make money thanks to our trading bots.
The following is, however, not an exhaustive list of the advantages offered by our platform:
- The commission fee is charged only after the user has made a profit;
- The bot settings open up a variety of ways to make a profit;
- RevenueBot has a marketplace where customers can buy a ready-made bot so they don’t have to create their own, or they can also sell their own bot if its configuration has proven to be effective. Furthermore, users can acquire in the marketplace the services of a mentor (an experienced user of the platform), who is ready to answer questions from beginners. Over time, you can become a mentor yourself and earn an extra income from it.
- Regular updates of the platform’s features, which optimize the trading process.
- The RevenueBot referral program allows you to earn money without having to trade. Refer new clients to the platform and you will get up to 30% of the platform’s commission on all profitable transactions conducted by the new user attracted by you every month (but no more than 15 USD).
As you can see, the platform has quite a lot of advantages to offer, all you have to do is start trading. There is no need to list them all when you can check everything yourself through RevenueBot’s official website. Have a good trade!