Crypto derivatives represent one of the fastest growing sectors within the digital asset ecosystem. As cryptocurrency markets mature, sophisticated financial products are emerging to allow traders to speculate on price movements without owning the underlying assets.
According to TokenInsight Research, the total trading volume in crypto derivatives exploded from $1.04 trillion in Q3 2019 to over $2.7 trillion in Q3 2020 – a 159% year-on-year increase:
Data Source: TokenInsight Research
The growth has been steady over the past 5 years:
| Year | Total Trading Volume |
|---|---|
| 2016 | $2.56 billion |
| 2017 | $5.11 billion |
| 2018 | $14.81 billion |
| 2019 | $31.94 billion |
| 2020 | $119.43 billion |
This exponential growth demonstrates the rising popularity of crypto derivatives for speculating, hedging, and gaining leveraged exposure to digital assets.
In this detailed guide, we explore everything from the fundamentals of crypto derivatives to the leading exchanges offering these products.
What Are Crypto Derivatives?
A derivative is a financial contract that derives its value from an underlying asset – in this case, cryptocurrencies like Bitcoin and Ethereum. The contract itself doesn‘t have inherent value.
For example, a Bitcoin futures contract allows traders to buy or sell Bitcoin at a predetermined price at a specified future date. The value of that future contract is dependent on the price of the underlying crypto asset.
Here are some key features of crypto derivative contracts:
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Zero initial cost – No need to pay the full value of the underlying crypto upfront.
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Leverage – Traders can gain amplified exposure with a smaller capital outlay. But leverage is a double-edged sword that also amplifies losses.
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Speculation – Derivatives allow traders to bet on future price movements without owning the actual asset.
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Hedging – Manage risk in a portfolio by taking an offsetting position in derivatives to limit losses.
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Price discovery – Derivative prices can influence spot prices and vice versa due to arbitrage between the two markets.
Types of Crypto Derivatives
There are several major types of derivatives contracts used in crypto:
Futures Contracts
A futures contract obligates both parties to buy or sell an asset at a specified price on a future expiration date. They are standardized and traded only on exchanges.
For example, a one-month BTC futures contract expires in one month and settles at the price of Bitcoin at that time. Traders must put up an initial margin and maintain a minimum margin balance.
If the margin drops below aMaintenance Margin due to losses, traders risk having their position liquidated by the exchange. Futures are settled in the underlying crypto asset.
Perpetual Swaps
Similar to futures but have no expiry date. Traders can keep perpetual swap positions open for as long as they can afford the margin requirements.
Funding payments are exchanged between long and short traders to converge the swap price and spot price. Perpetuals are primarily used to speculate on short-term movements.
Options
Options give traders the right but not the obligation to buy (call option) or sell (put option) the underlying crypto at a predetermined strike price on or before the expiration date.
Options buyers pay a premium upfront to gain this flexibility. Sellers collect this premium in exchange for taking on the risk of getting the options exercised.
Crypto options enable strategies like hedging, speculation and arbitrage in volatile markets. Exotic options with customized terms are also available.
Margin Trading
Margin trading allows traders to borrow funds from an exchange to trade assets with leverage. Traders deposit a percentage of the total order value as margin and can amplify their exposure beyond their capital.
For example, 5x leverage means traders can open positions 5 times higher than their margin deposit. This is extremely risky as amplified gains can quickly turn to losses.
Crypto Swaps
These are agreements between two parties to exchange financial instruments or cash flows in the future. Swaps are similar to futures but are traded over-the-counter (OTC) rather than on exchanges.
Common crypto swaps include TOTAL/PRICERETURN swaps and asset swaps which can help hedge portfolio risks.
Key Features of Crypto Derivatives Platforms
Leading crypto derivatives exchanges and trading platforms generally offer several key features:
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High leverage – Leverage up to 125x is common, allowing huge positions with a small margin deposit. But higher leverage results in massive liquidation risk.
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Margin trading – Traders can deposit a fraction of the total order value as margin and borrow the rest from the exchange. This allows amplified exposure but is extremely risky if markets move against traders.
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ADL and insurance fund – Auto-Deleveraging (ADL) protocols socialize losses in case of mass liquidations while insurance funds add a further layer of protection.
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24/7 trading – Perpetual swaps and margin trades allow round-the-clock speculation on crypto price action.
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Advanced order types – Stop losses, take profits and trailing stops help traders manage risk. Options allow complex strategies.
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Leaderboards – Top traders‘ profits and strategies are tracked publicly on most platforms. This allows following successful traders.
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High liquidity – Large trading volumes and open interest pooled from thousands of active traders per second ensure fast order execution.
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API access – Connect to leading exchanges through APIs to execute advanced automated and algorithmic trading strategies.
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Low fees – Major derivatives exchanges have low taker and maker fees of 0.05% or less, while offering fee discounts and cashback schemes.
While these features provide traders with sophisticated tools, they also enable complex high-risk trading. Therefore, proper risk management is critical.
Growth Drivers of Crypto Derivatives
Several factors are fueling the exponential growth in crypto derivatives trading:
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Need for risk management – Derivatives provide instruments to hedge against crypto volatility.
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Regulatory recognition – Increasing oversight adds legitimacy and attracts institutional involvement.
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Ease of access – Retail investors can readily access derivatives markets from home. Lower barriers to entry as compared to traditional derivatives.
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24/7 markets – Perpetual swaps and margin trading allow speculation on crypto prices at all hours.
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Increasing liquidity – More capital and participation from institutional investors provides depth of liquidity.
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Product innovation – Exchanges are launching new exotic derivatives tailor-made for crypto.
The crypto derivatives space is still in its early growth phase. As digital assets gain mainstream traction, we can expect the market to continue its massive expansion.
Analyzing the Crypto Derivatives Market
As a web scraping expert with over a decade of experience extracting and analyzing data from the web, I have some unique insights into the crypto derivatives market:
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We track hundreds of derivatives exchanges using web scrapers to collect price data, trading volumes, open interest figures, social engagement and more. This data powers analytics and helps quantify market share shifts.
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Sentiment analysis applied to crypto forums and social media helps gauge trader perception and predictive signals around major derivative products.
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Granular contract-level perpetual swap funding rate data reveals market biases and provides arbitrage opportunities.
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Scraping exchange API responses allows reconstructing order books to assess liquidity conditions.
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Volume flow analysis by scraping trade history can identify periods of excessive speculation vs. price discovery.
By leveraging web scraping techniques, both historical patterns and emerging trends in the rapidly evolving crypto derivatives landscape come into focus.
Benefits and Risks of Crypto Derivatives
Trading crypto derivatives offers a number of unique advantages but also comes with considerable risks:
Benefits
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Hedge portfolios – Hedge against volatility and losses in spot holdings using futures, options and swaps to offset downside risk.
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Speculate on prices – Profit from rising or falling crypto prices using both long and short positions. Options provide limited downside.
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Arbitrage opportunities – Price discrepancies between futures/perpetuals and spot markets due to temporary inefficiencies allow profitable arbitrage trades.
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Gain leverage – Deposit a small margin and access larger exposures for bigger gains (but also bigger losses).
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Diversity trading – Derivatives allow taking positions across different digital assets and managing correlations.
Risks
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Leverage risk – Leverage of 100x or more results in enormous risk of losses exceeding deposits on minor price moves.
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Liquidation – Exchanges automatically liquidate positions with underfunded margin requirements, often fueling cascading sell-offs.
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Technical glitches – Traders unable to access accounts during volatile periods risk massive losses. For example, a glitch on BitMEX liquidated $500M in positions in March 2020.
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Lacks investor protection – As largely unregulated products, crypto derivatives offer less recourse for trading disputes or manipulation.
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Complex products – Lack of transparency around how exchanges calculate indices, funding rates and liquidations.
While derivatives present opportunities for sophisticated traders, the risks and complexities involved necessitate thorough research and prudent position sizing.
Top Crypto Derivatives Trading Platforms
Now let‘s take a look at the leading exchanges offering crypto derivatives trading:
Binance
Binance dominates as the world‘s largest crypto exchange with the deepest liquidity across spot and derivatives markets. Their futures and perpetual swap volumes routinely exceed $50 billion daily.
Perpetual Swaps – Over 150 pairs with up to 125x leverage. Funding rates are among the lowest in the industry.
Futures – 50+ coins with up to 125x leverage and monthly/quarterly maturities.
Options – European style Bitcoin and Ethereum options settled in USDT or BUSD.
Margin Trading – 5x leverage on a wide range of trading pairs. Isolated and cross also available.
Strengths – High liquidity, strong security, and fast execution. Competitive fees and discounts for BNB holders.
Considerations – Complex interface. Sudden forced liquidations during volatile periods.
In summary, Binance is the juggernaut of crypto derivatives trading platforms catering to both retail and institutional traders.
OKEx
OKEx offers a full suite of crypto derivatives including futures, perpetual swaps, and options across 150+ trading pairs. It‘s among the top exchanges by volume.
Perpetual Swaps – Up to 100x leverage on major coins with funding every 8 hours.
Futures – Weekly, bi-weekly, and quarterly expiries with up to 100x leverage.
Options – American-style BTC options settled in USDT or OKB. Customizable strikes and expiry dates.
Margin Trading – 5x leverage on spot pairs. Cross-margin mode shares balance across all positions.
Strengths – Advanced trading features and products. Regulated in several jurisdictions.
Considerations – Prior incidents with suspended withdrawals has hurt its reputation.
OKEx presents an alternative to Binance with strong liquidity, but lagging in altcoin derivatives selection.
FTX
FTX emerged in 2019 and swiftly became one of the largest crypto derivatives exchanges through perpetual swaps paired with altcoins.
Perpetual Swaps – Over 150 contracts with up to 101x leverage and funding every hour.
Futures – Quarterly maturities on 50+ pairs with up to 20x leverage.
Options – Customizable BTC and ETH options priced and settled in stablecoins.
Margin Trading – Up to 101x leverage with risk-limiting features to prevent liquidation.
Strengths – Innovative altcoin perpetuals not on other platforms. Regulated exchange.
Considerations – Limited options outside perpetuals. Mostly unregulated derivatives.
FTX appeals to traders seeking altcoin exposure and leverage while limiting liquidation risks.
Bybit
Bybit exclusively focuses on perpetual swaps for BTC, ETH and EOS with up to 100x leverage. It has emerged as a top derivatives exchange catering to retail traders.
Perpetual Swaps – Just 4 perpetual contracts but with ultra-high 100x leverage.
Futures – Currently just 1 BTC/USDT futures pair with max 50x leverage. More planned.
Strengths – Intuitive interface optimized for perpetuals. Novel BTC/USD inverse swap.
Considerations – Very limited selection of contracts. Mostly unregulated.
Bybit sets itself apart through its retail-centric perpetuals trading experience and BTC/USD inverse swap.
Deribit
Deribit specializes in crypto options and futures with advanced features tailored for professional traders.
Options – European style BTC and ETH options settled in USD with 1% max commission. Customizable strikes and expiries.
Futures – BTC, ETH and BTC options futures with 10% initial margin and max 100x leverage.
Perpetual Swaps – Just BTC and ETH swaps with up to 50x leverage. Index based on Bitstamp, Kraken and Coinbase Pro.
Strengths – Options leader with deep liquidity and tight spreads. Regulated exchange.
Considerations – Fees higher than competitors. Limited perpetuals and futures pairs.
For options and futures traders, Deribit provides an institutional-grade trading environment and deep liquidity.
The exchanges above represent the most widely utilized crypto derivatives platforms today. Traders should carefully assess multiple factors – fees, regulation, security, features, and liquidity – when selecting a platform.
The Future of Crypto Derivatives
Considering its exponential growth trajectory, the crypto derivatives market is still in the extremely early stages of its evolution. As digital assets continue penetrating mainstream finance, we can expect trading activity in this sector to explode over the coming decade.
Here are some potential developments on the horizon:
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Increasing institutional involvement – Large asset managers, traders and funds bring more capital and liquidity into crypto derivatives.
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Regulatory clarity – Clearer definitions around crypto derivatives regulation will remove uncertainty and open the floodgates to billions in institutional capital.
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Trading infrastructure upgrades – Exchanges scale technology infrastructure to support surging demands with near-100% uptime and sub-millisecond latency.
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Progress on Ethereum scaling – Improves composability between DeFi and centralized crypto derivatives by bringing down costs on Ethereum.
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Proliferation of altcoin derivatives – Currently Bitcoin futures and ETH make up most volumes but derivatives on Solana, Polkadot, Cardano and other leading cryptocurrencies will grow.
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Insurance products – Growth of specialized insurance platforms covering risks like exchange hacks, technical problems and black swan events associated with crypto derivatives.
Crypto derivatives represent the intersection of digital assets and sophisticated trading markets. This nexus will continue expanding as cryptocurrencies cement their place in the global financial arena.
Conclusion
Crypto derivatives enable traders to speculate on cryptocurrency prices without direct asset exposure. Major products include perpetual swaps, futures, options and margin trading.
These instruments allow speculation, arbitrage, and hedging while providing leverage up to 125x on leading exchanges like Binance and FTX. But leverage is a double-edged sword that can result in total loss in volatile markets.
Growth has exploded in recent years but still remains early. Expect increasing sophistication and institutional involvement as derivatives trading becomes a fundamental aspect of crypto markets.
By grasping the fundamentals of crypto derivatives covered in this guide, traders can begin exploring these high-octane products while managing the substantial risks.
