Crypto Derivatives: Complete Guide on Crypto Futures & Options Trading
Tomas Green

Meta Description: learn what crypto derivatives are, how they are useful, and some things to watch out for when trading cryptocurrencies.

Key Takeaway

1. Reuters reported that crypto derivatives volume on centralized platforms rose to $3.12 Trillion in July.
2. To trade Bitcoin derivatives, the first step is to consider the crypto derivatives exchange you will use.
3. Traders can buy derivative cryptocurrency contracts on commodities, crypto, currencies, stocks, and bonds.
4. Forwards, options, futures, and swaps are today's common types of derivates.
5. Options are the best choice for bullish markets, while futures are preferred for bearish markets.

Can you make money when the price of your favorite cryptocurrency (say Cardano) is going down? If yes, how do you profit from a down-trending market?

The answer is simple, Crypto Derivatives. Crypto derivatives are trading instruments that allow a cryptocurrency owner to profit from the cryptocurrency market's volatility. With these derivative tools, a skilled investor can profit off both sides of the market at any time he chooses.

What Are Traditional Derivatives

Although its history is debatable, traditional derivatives have proven to be a way of trading traditional assets by betting on their future prices.

Forwards, options, futures, and swaps are the common types of derivatives today, and while it is difficult to gauge the value of the traditional derivatives market, it is safe to say it runs into trillions of dollars in volume. With traditional derivatives, you can foresee the price of oil dropping in a few months and buy a futures contract to that effect. Instead of buying large barrels of oil with a derivative contract, you still benefit from the price movement you predicted.

Derivative Trading

Derivative trading is when traders bet on the potential price movement of an asset by purchasing or selling derivative cryptocurrencies’ contracts in order to achieve more profits than if they bought the underlying asset on the spot market.

Traders can buy derivative contracts on commodities, crypto, currencies, stocks, and bonds. Both buyer and seller wager on the asset's future value, and a contract is their commitment to their guess of the asset’s direction.

What Are Crypto Derivatives

1. Crypto Futures

This is a prior agreement between a buyer and a seller to trade an asset in the future. This agreement is a wager between both parties speculating the future value of a particular asset at a specified period of time in the future. There are numerous types of derivatives crypto, but this is the most utilized by big game investors because the data from here is valuable in forecasting price movements.

2. Cyrpto Options

In crypto options, traders are allowed to transact a certain cryptocurrency using a future price target and a specified price. It differs from futures by allowing the buyer to opt-out of future purchases of such assets before the expiry date. The buyer also makes a commitment to the seller in the form of a premium. Crypto options can be grouped by their exercise type, the quoted currencies, and how they are settled.

3. Perpetual Contracts

Perpetual futures is a crypto type that is common amongst day traders. It has a lot in common with futures, only that a trader can hold the perpetual futures indefinitely. It has no expiry date. The only commitment a trader has to pay is a fee to keep the contract alive. Called funding rate. Funding rates are paid by the sellers to hold their positions for as long as the trader chooses with at least a basic amount in the account called margin.

How to Trade Crypto Derivatives

Not all crypto exchanges that offer spot trading also offer derivatives trading. To trade a Bitcoin derivative, the first step is to consider the crypto derivatives exchangeyou will use. Two major features that should guide your choices are trading fees and trading volume. After that, you will need to deposit your margin and start trading. Some exchanges will require KYC, but it all depends on the exchange’s requirements.

How Large Is The Cryptocurrency Derivatives Market?

It is impossible to gauge how large the overall cryptocurrency derivatives market is, but two important statistics point to how large it is. According to a crypto derivative volumes report in Business Standard, the derivative market reached 69% of total crypto volumes in July (from a previous 66% in June) with a valuation totaling $4.51 trillion. At the same time, a report from Reuters showed that crypto derivatives market volume on centralized platforms rose to $3.12 Trillion in July 2022.

The Goal of Cryptocurrency Derivative Trading

The ultimate goal of a crypto derivative is either hedging or speculation.

1. Hedging

This is a position taken to protect a crypto portfolio from market volatility. Positions are opened contrary to the spot position, that is, when there is a profit or loss in one position, it is offset by changes in the value of the other position.

These positions are taken by traders or crypto asset owners to minimize losses and protect assets from abrupt market changes. Waiting for an asset to recover from a value drop is less beneficial than hedging.

2. Speculation

The normal way to speculate in cryptocurrencies involves buying a token when you feel it is oversold, holding onto it until it appreciates, and selling it after it has rallied. Just one problem. Cryptocurrencies won’t always go up. There are times when it is clear to all that the market is ripe for a slowdown or correction. Derivatives help a trader speculate on both ends of the market. If you believe a crypto asset is going up, you can use some leverage to increase profit. In the same way, if the market is going down, you can still profit from it.

Pros of Derivative Trading

1. Market Effectiveness

Derivatives are thought to improve the efficiency of financial markets. The payout of assets can be replicated through derivative contracts. All assets and underlying assets are balanced to avoid undue advantage through arbitrage opportunities.

2. Management of Risks

The notoriety of the crypto market is well known due to its volatility. Therefore to minimize risks caused by such actions, derivatives are used to offset losses acquired by holding underlying assets.

Cons of Derivative Trading

1. High Risk

Losses are sometimes incurred by both buyers and sellers because of the volatility of derivative contracts and the fluctuating value of underlying assets, particularly in leveraged contracts.

2. Regulatory Concerns

In some countries of the world, derivatives are illegal. Thus for any trader to involve themselves in derivative trading, they must be within the confines of a country where derivatives remain legal.

3. Speculative Features

The business of derivatives crypto trading hinges mostly on speculation. Due to its unpredictability, one wrong speculation could yield huge losses.

4. Absence of Due Diligence

There is hardly any place for a background check for futures carried out over-the-counter. Such transactions are not to be trusted as they are not often in compliance with laid-down procedures.

Crypto Derivative Trading Limitations

1. Regulatory Concerns

Derivative crypto trading is not legalized in all regions of the world. Therefore to have successful derivative trading between two parties and avoid counterparty risk, both parties must be within a zone that legalizes derivatives.

2. Absence of Due Diligence in Over-the-counter Derivatives

OTC futures run the risks of the counterparty. Traders have no way to confirm the necessary details or the authenticity of the other party because businesses like this fall outside compliance procedures.

3. High Risk

Investors leverage on derivatives but do that with the risk of losing assets during liquidation. Losses could be incurred by a trader who uses leverage to short the market wrongly.

Who Should Deal in Crypto Derivatives?

The description of the various types of crypto derivatives tokens may paint the picture that they are easy to trade. In reality, it is not so.

While derivatives trading is open for anyone with a crypto wallet and a trading account, the following set of investors will find more success because of their level of experience.

1. Adept Investors

These are individuals who have more than a basic understanding of crypto derivatives (risks inclusive). They are more often long-time traders, and their time in the market can help them recognize and understand trends and patterns faster than new traders.

2. Institutional Investors

These individuals hold an impressive portfolio and vast experience working in and with companies to analyze the market. They hold the right strategy, information, and tools when trading in derivatives.

3. Miners

Altcoin or Bitcoin miners can make use of crypto derivatives to boost their profit margin. Recently mining, unlike before, has been extremely difficult, and profits are even tougher to obtain. But with hedging of futures, the little profits obtained are well kept, and there is a diversification of income.

How to Effectively Trade Crypto Derivatives

If anyone gives you a guarantee that you will always profit from crypto derivatives tokens, you might be a target of a scam. There is no sure formula to always profit from the market because, more often than not, the premise for different price patterns differ. Despite this, there are some unwritten rules that can help you minimize risk as much as possible.

First, the current market sentiment will help in choosing which derivatives type to go with. Options are the best choice for bullish markets, while futures are preferred for bearish markets. This does not mean you cannot use any derivative contract at any time; it just shows which one trader prefers due to the nature of any particular market.
Crypto lending is another way to profit from the volatility of the crypto derivatives market. The process is complex, but it involves borrowing and lending with the hopes that the asset price will decrease. Of course, various technical analyses go behind the scene to ensure successful predictions.

Yet another important rule to look out for is the choice of a trading platform. As a new derivatives trader, selecting a reliable trading platform is equally as important as any other advice here. Qualities to look out for in selecting a trading platform include the verifiability of users, the trading volumes (evidence of good service and authenticity), and the safety measures put in place to secure transactions must be up to date. Fortunately, Redotis one exchange that fits the description.


With the crypto market in a protracted state and the bears seemingly still in control of the market, instead of waiting for the next rally, you can make some profits by buying some derivative contracts. Some of them, like options, may require complex strategies, while some others, like futures, just need basic trading knowledge and a good risk management plan. Now that you can boldly answer the question, what is a crypto derivative? We hope you try your hands on demo accounts to have a feel of how it works.