Essential Features of a Crypto Derivative Exchange

In the last couple of years, the cryptocurrency trading market cap has grown multi-fold. Currently, cryptocurrency is one of the most progressive industries. On a regular basis, industry leaders are coming up with new trading instruments to maximize profits for the traders. Crypto derivatives trading is one such trading instrument that has gained massive popularity nowadays. Not only the traders but even the exchanges are flocking towards it.

Exchanges like the Chicago Board Options Exchange (CBOE) and Chicago Mercantile Exchange (CME) launched crypto derivatives some years back. The profits they make with Bitcoin Futures are huge. Thus, many exchanges are considering offering the option of crypto derivative trading to their users.

What is crypto derivatives trading?

For someone who does not know what crypto derivative trading is, let us first understand the concept and why is it becoming so popular. In a traditional market, derivates are contracts representing the buy or sell deal of an asset, a commodity, or a financial instrument. However, in crypto derivatives trading, the underlying asset is cryptocurrency. The cryptocurrency derivative exchange and the trader agree to a certain sell or buy price on a future date. When the contract matures, the buy or sell executes irrespective of the market price of the underlying asset.

Why is it becoming so popular?

The cryptocurrency market is very volatile and derivative trading offers traders a hedge against the market volatility. It provides traders with an instrument to mitigate the risk against a volatile asset like bitcoin.

How does derivative trading benefit the exchanges?

In August 2020, the cryptocurrency derivatives trading volumes grew by 2638% and hit a record high of $712 billion. As the derivative trading volumes continue to grow, the exchanges are making more commissions. On top of that, by offering a derivative trading feature, the exchanges are able to create a special place in the competitive crypto exchange market.

What kind of cryptocurrency derivatives can you offer?

A crypto derivative exchange can offer the following types of products to the traders:

• Swaps

In a swap, two parties agree to exchange cash flow between one another. A swap agreement basically details the payment dates of cash flow and the calculation method used.

• Futures

A Futures contract mentions the future date and the buy/sell price of the underlying asset. These are less risky as they are always traded on exchanges.

• Forwards

Forwards are similar to Futures but the difference lies in where they are traded. Unlike Futures, the Forwards are traded on the over-the-counter exchanges. These are exposed to more risk.

• Options

As the name suggests, Options are just like Futures but the buyer is not obligated to buy the assets as per the date mentioned in the Options.

• Perpetual Futures

These contracts have no expiry date. The traders can trade them whenever they desire. Thus, these are very volatile.

Most desired features of a derivative trading platform

• Security

Undoubtedly, it is the foremost aspect of a cryptocurrency derivative exchange. With the number of hacks growing, the traders have become more educated and they run thorough research before they pick a platform. Thus, it is very important to offer traders a highly secure and reliable platform.

• Transparency

A crypto derivative exchange is a money handling tool. The operators of the exchange must ensure that the trading policies, the fees, and the dispute resolution policies are in place. Along with that, the traders must be notified about any changes to the policies.

• Liquidity

An exchange platform with good liquidity is always preferred by a trader. This is because higher liquidity means the trades can be made easily and quickly. Along with that, price volatility can also be evaded.

• Fees

This is the most important aspect of a cryptocurrency derivative exchange. Some of the exchanges offer traders a floating fee which decreases in case the trading volume increases. Make sure you offer traders competitive fees, more features, and higher security.

To wrap

Building a crypto derivative exchange might sound like a challenging task. But the business opportunity it provides is not something that should be given up.

At Antier Solutions, we offer customized services for derivatives exchange development. Whether you want to integrate a derivatives trading module into your existing exchange or build a completely new exchange from the ground up, we offer solutions in line with your business needs. In addition, we offer ready-to-deploy derivatives exchange fortified with a robust risk management system, institutional-grade security, and other market-leading features.

Schedule a free demo of our white label derivatives exchange solution or connect with our subject matter experts to share your needs for a custom exchange to be built from scratch.