Bitcoin and cryptocurrency derivatives are becoming the way of life for serious crypto traders. Why not, even when applying derivatives to a volatile asset-class like Crypto is so rewarding!
Chances are that some of you might think where can you trade them to take advantage of these crypto derivative products? Speaking of which let us introduce you to Phemex.
Phemex is a cryptocurrency derivatives exchange offering Bitcoin and USD settled perpetual contracts of BTC, ETH, XRP, LTC, EOS, with up to 100X leverage. It is an innovational, easy to use, professional, trustworthy and one of the safest exchanges in the market.
What’s a Derivative?
A derivative is a contract between two or more parties whose value is based on a pre-agreed underlying financial asset (like a security) or set of assets. Common underlying instruments include bonds, commodities, currencies, interest rates, market indexes, and stocks.
How Derivatives Exchanges work?
A Bitcoin derivative exchange traded derivative is a financial instrument that trades on a regulated exchange whose value is based on the value of another asset. These derivatives can be used to hedge exposure or speculate on wide range financial assets like commodities, equities and currencies. On such exchanges one can trade these instruments for the base currencies such as BTC and USD as offered by Phemex. Base currency may vary from exchange to exchange depending on which currencies are supported on a particular exchange. However, derivatives do not have inherent or direct value by themselves; the value of a derivative contract is purely based on the expected future price movement of the underlying cryptocurrency.
Reasons for Trading Derivatives
Derivatives are highly complex financial instruments that are used by advanced or technical investors. There are three main reasons for the use of derivatives:
1-Protection from Volatility
The fundamental reason for the existence of derivatives is for individuals and corporations to reduce their risk exposure and protect themselves from any fluctuations in the price of the underlying asset. Businesses would also need to use derivatives to reduce their risk exposure. For example, a bakery trying to buy wheat flour from a farmer would use a derivative contract to ‘Lock-in’ the price of wheat flour for the year.
Investors could also use Derivatives to protect their investment portfolio. This is also called Hedging, which entails taking measures to offset potential losses. In such cases derivatives serve as a vital risk management technique for institutions and investors. The concept of hedging is similar to owning an insurance policy.
Traders usually utilize derivatives to speculate on the prices of cryptocurrencies with the main objective of profiting from the change in the price of the underlying cryptocurrency. For example; a trader might attempt to profit from an anticipated drop in the general prices of cryptocurrencies by shorting the coin. So, shorting refers to the act of betting against the price of a security. If someone thinks that a particular cryptocurrency may be experiencing a downward trend soon, he could sell derivative contracts in the market to anyone who thinks the opposite that the market will move upwards.
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