How And Where To Trade Crypto Derivatives

If you’re familiar with crypto, you’re almost certainly familiar with crypto derivatives. Not enough to confidently trade them, perhaps, but you can’t have failed to encounter the concept while traversing the cryptosphere. Derivatives are everywhere: on crypto Twitter, where traders are shilling their exchange ref links; on mainstream exchanges, which have begun to get in on the act too; and all over Telegram, where the forced liquidations of whales who misjudged the market has become a spectator sport in its own right.

What you may have failed to encounter, up until now, is a calm and rational exploration of what crypto derivatives are, why they’re appealing, and how to gain exposure to these assets, should you decide to try them for yourself. Today, traders have a wide range of derivatives platforms to choose from, with names such as BitMEX, Bybit, and Deribit all established players. Before you rush off to sign up and start playing around with derivatives contracts, though, it’s worth taking some time to master the basics.

What Are Crypto Derivatives?

A derivative is a tradable product whose value is derived from an underlying asset it’s based on. In the case of crypto, that asset is typically bitcoin, although there are derivatives markets for Ethereum, EOS, and other cryptocurrencies too. The product itself usually takes the form of a futures market, although you may also heard crypto derivatives referred to as options or swaps. Without getting too technical, these are all derivatives whose only material difference is the manner in which the underlying contract operates.

Regardless of which derivatives product you’re using, the process is much the same: you can place a trade that is long or short (aka higher or lower) on where the price of the underlying asset will go next. Call it correctly, and you’ll make a profit. Call it wrong and you’ll make a loss. Call it badly wrong and you could lose your funds (known as your “margin”) altogether by having your position liquidated. That’s why this occurrence is also known as being “margin called.”

This may sound like gambling, but it’s not nearly as reckless as that. Futures trading of crypto derivatives is essentially a high stakes version of traditional trading, with greater risk and reward. Those stakes can be upped considerably once traders apply leverage to their positions, which have a multiplier effect. Margin trading, also known as leverage trading, allows traders to place an order size several times larger than the amount of funds they have on hand. BitMEX and Bybit, for example, both offer up to 100x leverage, which means that with $1,000 of funds on hand, you could place a trade with a maximum value of $100,000.

Margin Fees and Other Costs

Nothing in this life comes for free, and in return for borrowing margin, you’ll have to pay a fee for keeping your position open, which is typically applied every 4-6 hours. The longer your position remains open, the more you’ll have to pay. Provided the market’s moved in your favor in the interim, you’ll be in profit, and thus capable of keeping your order open. If your trade is underwater, however – that is to say it’s running at a loss – then the cost of keeping it open, in the hope of recouping those losses, may eventually get too costly due to the fees slowly eating into it. You might decide to cut your losses and close out your trade, before your position winds up being forcibly liquidated.

The higher the amount of leverage you apply, the less movement it will take in the price of the underlying asset for your position to be liquidated. As a general of thumb, the lower your experience of margin trading, the lower your leverage should be. Even traders who are veterans at bitcoin futures will rarely go above 30x, and there are few circumstances where going 100x on a trade is likely to be a wise move. Nevertheless, it’s good to know the option is there, should you ever need it.

Where to Trade Crypto Derivatives

If you’re intent on dipping a toe into the fast-flowing waters of cryptocurrency derivatives, there are a few potential jumping-off points. You could go straight in at the deep end, and sign up for BitMEX, the market leader by volume. It’s not the most user-friendly of environments, however, and can be an unforgiving playground for all but the savviest of souls. For a shallower entry point, something like Bybit will give you a grounding in crypto derivatives, with simple tutorials, mobile app, good customer support, and an interface that’s simple to grasp. There are also margin products now available on Binance, and on a number of emerging exchanges such as CoinFlex.

When you first foray into the field of crypto derivatives, it can feel like learning a new language. There’s a lot of technical terms to get to grips with, and order book features and settings you’ve never encountered. Choose an exchange that will support your learning, helping you to level up your knowledge and with it your profits as you start to master the art of derivatives.

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