When most traders first enter cryptocurrency markets, they typically do so using spot exchange platforms, which essentially allow traders to buy and sell digital assets between one another using a central order book.
However, many traders quickly find that although simple, these markets can be overly restrictive, leading them to seek out other, more profitable ways to trade. This is where cryptocurrency derivatives come in.
What are Cryptocurrency Derivatives
Briefly, cryptocurrency derivatives are a recent innovation that allows you to speculate on the price action of a market, without necessarily investing in that market directly — similar to how you might speculate on whether oil prices will climb or fall without actually buying and selling barrels of oil.
These come in a variety of major types, including futures, options, and swaps as well as simpler perpetually settled contracts found on the newest exchanges. These give traders the opportunity to execute more robust trading strategies that are difficult, if not impossible to execute when trading spot markets. And as we’ll soon see, they can be used to turn a substantial profit while severely limiting downside risk.
For the most part, cryptocurrency derivatives are settled in stablecoins, which means you open your position using whichever cryptocurrency you choose, but when the contract settles or you cash out, you’ll receive the stablecoin equivalent value. This makes keeping track of your profits and losses much easier since you no longer need to constantly check the dollar-value of your positions.
The Benefits of Trading on Leverage
Among the myriad benefits of cryptocurrency derivatives exchanges, the capacity to trade using leverage is arguably the most significant.
Briefly, leveraged trading means you are able to open positions much larger than your account balance by temporarily borrowing funds from the exchange or other users while using your account balance as margin. Some of the most advanced derivatives exchanges like Bityard and Binance allow you to trade with up to 100x leverage, essentially allowing you to open a 100 BTC position with just 1 BTC account balance, or $50,000 with just $500, and so on.
No matter what happens, your risk is limited to your account balance.
As you might expect, this allows you to generate profit at a massively accelerated rate, since you have essentially amplified your exposure to the market, and your profits are multiplied by the amount of leverage you used.
As such, what would otherwise amount to 10% profit without leverage would be multiplied to 1,000% profit if trading on 100x leverage — that’s the equivalent of turning $50 profit into $5,000. This ensures even smaller traders can make profits like a whale.
With that said, it is generally recommended that less experienced traders begin trading with lower leverage to get a feeler for things, since the leverage also works to amplify losses. Likewise, tight stop-loss and take-profit settings should be used to maximize profits and minimize losses where available.
Doubling the Opportunities
In the last decade, the vast majority of cryptocurrencies have displayed an overtly bullish trend, and many have gone on to experience meteoric growth in this time. However, it has been a bumpy ride, and most cryptocurrencies have also suffered from periods of bearish activity, losing significant value as a result.
As a trader, it’s important to recognize when to hold, and when to short a market. This means selling when the market will drop and buying when it will rise, regardless of your opinion of the cryptocurrency or its long-term prospects.
Fortunately, it doesn’t matter which direction the market moves when trading derivatives contracts, since they allow you to speculate on either direction with ease. This means you can turn a profit regardless of whether the market is bullish or bearish, so long as you’ve opened the appropriate long or short position respectively.
This potentially doubles the number of profitable trading opportunities available, giving traders to chance to double their profits if used correctly.
This, combined with the capacity to trade with leverage shows that derivatives not only enable more profitable trading opportunities in general, but the magnitude of profit made from each successful trade can also be multiplied by a factor of 100 — potentially turning even the smallest of traders into a whale in no time.