Introduction to Derivatives – Deribit Official
A derivative is a contract between two or more parties that derives its value from an underlying asset.
For example, a Bitcoin futures contract is a derivative contract that derives its value from the underlying asset — Bitcoin.
The precise relationship between the price of the underlying asset and the derivative depends on various factors and the specifications/type of the derivative contract.
While derivative contracts are often designed to track the price of the underlying asset, owning a derivative contract is not the same as owning the underlying asset.
For example, if you were to buy $10,000 worth of Bitcoin on a spot exchange, you would need to pay the full price of $10,000 to another party, who, in exchange, would give you $10,000 worth of Bitcoin, which you then would have full ownership of.
In contrast, if you were to purchase $10,000 worth of Bitcoin futures contracts, you would gain $10,000 worth of exposure to the price movements of the Bitcoin futures contract. Therefore, you would experience similar profits/losses. However, you would not have ownership of the underlying asset, as no actual exchange between USD and Bitcoin would have taken place.
Speculators — Traders betting on the price movements of the underlying asset.
Hedgers — Traders with other open positions, who are looking to limit their market risk exposure.
An example of this is Bitcoin miners, who would like to hedge their holdings against possible price decreases.
Liquidity providers/market makers — Traders that provide liquidity to both sides of the market. These traders profit by capturing the bid-ask spread and taking advantage of any maker rebates.
Arbitrageurs — An arbitrageur is someone who takes advantage of price differences between either different products or different exchanges. This nets them a small profit and improves market efficiency.
Lower fees — Derivatives mostly have lower trading fees than the underlying spot market, and can even have rebates for maker orders.
Leverage — Derivatives markets often provide leveraged trading. Trading with leverage allows traders to control the same size position as they would by having the position on the underlying asset, however, with a smaller amount of capital.
Take net short positions — Without leverage, traders cannot sell more than they own, however, with leverage, traders can take a net short position allowing them to profit from the price decreasing.
Hedging — Derivatives can be an excellent tool to limit risk, allowing traders to lower their market exposure without selling the underlying asset.
Capturing price differences — Traders can take advantage of price differences between a derivative and the underlying asset or between two derivatives.
There are currently three different types of derivatives available on Deribit, futures, options and perpetual swaps. We will cover each of these in more detail in the next few lessons.
Course Credit(s):
Cryptarbitrage
Cryptocurrency Exchange Expert
MrJozza
Cryptocurrency Exchange Expert
Published at Mon, 21 Oct 2019 09:54:36 +0000
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