An Insight into Crypto Derivatives Trading

As one of the oldest forms of a financial contract, derivatives have always been loved by the traders as they grant them the ability to hedge their trade or speculate on the price of the assets they derive their value from. In crypto trading, the underlying assets are cryptocurrencies. If you are planning for cryptocurrency exchange development, providing your platform users with the option of derivatives trading can increase your earnings.

Understanding the types of derivatives

Five major types of derivatives you may allow your traders to deal in are:

• Futures

Crypto futures empower traders to buy the asset at a pre-determined price on a specific future trade. Traded over-the-counter, it has standardized terms which include an exchange-specified contract unit, tick size, expiration, and notional value.

The market for crypto futures contracts is highly liquid, enabling traders to enter and exit at will. Speculators bet on the direction of the underlying asset’s price. Futures are generally closed out before maturity.

• Forwards

Having subtle differences with futures, forwards are a private contract between two parties. These are not standardized and have a low level of regulation and oversight on the settlement. Forwards carry a credit default risk as these are privately negotiated. Regarding the payments, it depends on the counterparty. Forwards are non-transferrable and unregulated.

• Options

Options give the buyer the right but not the obligation to buy or sell the underlying asset at a pre-determined price. Unlike the futures, if someone isn’t interested in selling or buying, they may not. Call options enable the holder to purchase the asset at a pre-determined price within a certain timeframe. A Put option, on the other hand, grants the holder the right to sell a set number of equity shares at a given price, before the expiration date.

• Swaps

Swaps are used by the holders to exchange one type of crypto asset with another. Coin swap is the process of moving digital coins from one blockchain to another at a pre-set rate. Suppose that the price of ETH on an exchange substantially differs from another. A smart trader can take into account this discrepancy and swap the cryptocurrency he/she is holding with ETH and then use it quickly to make the arbitrary trade and pocket the gains.

• Perpetual contracts

A perpetual contract is alike the Futures contract but without any expiry or settlement. These contracts trade close to the underlying reference Index Price, which is priced on the average price of the asset. This contract allows the traders to hold on a position for as long as they like.

You can connect with the experts at a reliable cryptocurrency exchange software development company to decide upon the type of derivatives that can be integrated into your exchange platform.

How do traders benefit from derivatives?

Most traders will follow a long strategy for garnering profits. This strategy involves buying a digital coin at a low price and selling it at a higher price later. But this strategy will only work during a bull market. Like all strategies in crypto trading, it involves a bit of trade.

To make money from a bear market, traders imply the shorting strategy. To short an asset, the traders will borrow it from a third party and sell it on the market when they expect the market to follow a downtrend. When the asset’s price goes down, the trader buys back the coin at the lower price, takes their cut, and returns it to the original owner along with commission.

How do exchanges benefit from launching derivatives trading

First of all, you give your traders another reason to visit your exchange. There are many crypto traders out there and you won’t appreciate them moving to your competitors just because the traders want to trade in derivatives and you lack the facility.

You can take a commission on all derivatives trading happening on your exchange. For shorting, you can lend traders the crypto assets.

A force multiplier for your earnings is the margin facility for derivatives trading. On one hand, it improves the traders’ ability to make money, while on the other, you get to make big profits with larger volumes of trades. Even if a trader fails to maintain their margin account, there is no cause to worry as you can liquidate their assets.

Summing up

Offering derivatives trading on your crypto exchange will increase your pull and earning capacity substantially. There are five major derivatives. You may choose a couple of these or all of them, depending on your business requirements. Smart traders will be able to garner good money from derivatives trading along with you.

As a reputable crypto exchange software development company, Antier Solutions has made a name for itself. We have delivered various successful crypto exchange development projects to start-ups and established enterprises worldwide.

Connect with our subject matter experts to share your needs for cryptocurrency exchange development.