Cryptocurrency derivatives are complex financial instruments that are becoming popular among traders and investors globally. Estimates show that these assets have even beaten spot prices that are common with most traders.
While the volume of spot cryptocurrencies declined in January 2021, derivatives volume surged to over $2.6 trillion. In this article, we will look at what derivatives are and identify some of the best exchanges to use.
What are cryptocurrency derivatives?
The concept of derivatives has been around for decades. It started in leading assets like commodities and then expanded to the stock, forex, and index markets. Today, many Wall Street companies actively take part in the market.
A common question is what cryptocurrency derivatives are. They are financial assets that are more flexible than real coins like Bitcoin and Ethereum. These assets derive their value from the underlying cryptocurrency. For example, when you buy a Bitcoin derivative, you don’t own the real coin, but you will benefit from the movement of Bitcoin.
Types of cryptocurrency derivatives
There are several types of cryptocurrency derivatives. First, there are futures contracts, which are offered from a company like CME. The most popular cryptocurrency future contract is Bitcoin, which was used to build the first American BTC ETF.
Second, there are perpetual futures. These futures contracts differ from the traditional ones in not having an expiry date.
Third, there are leveraged tokens, which help to amplify profits and losses. For example, a leveraged token like ETHBULL 3x means that a user will gain 3% when the price of Ethereum rises by 1%. As such, when things are going on well, it means that a trader will make a lot of money.
Further, there are volatility contracts that help traders make money by betting on implied volatility. Examples of these are Bitcoin Volatility Token and Inverse Bitcoin Volatility Token.
Like other forms of derivatives, cryptocurrency ones are highly risky. Indeed, most people who start trading them end up losing money. As a result, the market is highly restricted. Indeed, the service is not allowed in several countries.
Still, the market is continuing to grow, as evidenced by some of the recent deals. Coinbase acquired Fairx in 2021 in a bid to expand. Further, Crypto.com bought two derivatives companies from IG Group in a deal valued at over $200 million. FTX US bought Ledger X, while CBOE has also increased its investments in the industry.
FTX is a leading company in the cryptocurrencies industry. While it offers exchange services, it is widely known for its various derivatives services like leveraged tokens and volatility indices.
FTX has raised billions of dollars from venture capital firms in the past few years, bringing its private valuation to over $25 billion. According to CoinMarketCap, the company’s derivatives business processes over $5 billion worth of cryptocurrencies every day.
There are several reasons why using FTX is a good idea. First, the company has a long reputation for offering these services. Further, it offers a large collection of assets to trade.
Additionally, the fees are affordable. The table below shows the fee schedule for futures and spot markets. The company also charges a creation and redemption fee of 0.10% on all leveraged tokens.
Further, FTX has the FTX Token (FTT), which is mostly used to provide discounts to its holders. For example, you will pay a lower fee when you are executing orders using the token.
Binance is the biggest crypto exchange in the world, with over 90 million customers globally. Estimates place its market valuation to be over $300 billion. Judging by the market performance of Coinbase, that value has likely dropped.
Binance provides multiple services to its global customers. It has a basic exchange where people buy and sell cryptocurrencies. Its fastest-growing service is derivatives, where its services include Binance Futures, perpetual futures, vanilla options, leveraged tokens, and battle. In the battle product, traders predict whether a coin will rise or fall and then make money if they are right.
Binance is a good derivatives exchange because of the vast number of services it offers and its friendly fees. Also, BNB coin holders get discounts. The company’s derivatives division handles over $40 billion in transactions per day.
OKX is one of the leading cryptocurrency companies in the world. The company is well-known for its spot exchange solutions that enable people to buy and sell cryptocurrencies. Like other exchanges, it is seeing strong growth in the derivatives industry.
OKB offers a vast number of financial derivatives. According to CoinMarketCap, the exchange handles over $21 billion worth of transactions every day. As a smaller company than Binance, the firm offers lower fees as shown below. OKX also has a fast-growing token that gives customers some discounts.
The only con is that OKX provides fewer solutions than FTX and Binance. For example, it does not have leveraged tokens.
Bitget is a small but fast-growing company that specializes in derivatives trading. It is a unicorn that raised $10 million in 2020. The fundraising was led by companies like NetEase, Matrix Partners, and DST. The firm offers several futures like USDT-M Futures, Coin-M Futures, and USDT-M Futures.
Data by CoinMarkeCap shows that the company processes over $7.5 billion worth of cryptocurrency derivatives every day. The image below shows the fee structure of Bitget.
The cons of using Bitget are that it does not have its native cryptocurrency, meaning that it does not offer any discounts like Binance and FTX.
Cryptocurrency derivatives have become popular assets such that they have overtaken spot instruments. In this article, we have looked at how these coins work and noted some of their types. In addition to the four we have looked at, the other popular exchanges are CoinTiger, BingX, and Huobi.