How are Derivatives Affecting the Crypto Industry?
While Covid-19 continues to impact growth forecasts, monetary and fiscal policies around the world, crypto-trading has been on the rise, as many investors are viewing cryptocurrencies as a great new tool to fight inflation and hedge against uncertainty, as well as a way to invest in a profitable alternative vehicle.
As cryptocurrency trading enjoys increasing popularity, different financial vehicles have been created to provide investors with more investment options than what is available in the traditional financial markets. These new products help better manage risk through hedging, as well as to get a chance to rely on margin trading to increase profits with borrowed funds and without having to own the underlying asset (mostly used for speculation).
This market is called the derivative market. Derivatives are usually products used by two parties to agree on an underlying asset’s price over a set period of time or at a future specified date. As you might have guessed, the value of a derivative contract is derived from the value of the underlying asset.
What type of crypto derivatives can traders use?
As a crypto-investor, there are different financial products you can use to take advantage of derivatives on the crypto-market: forwards, futures, swaps, warrants, turbos, perpetual contracts, option and CFDs.
To get bigger market exposure to the cryptocurrency market, many retail investors are using CFDs for cryptocurrency trading though Forex brokers such as easyMarkets. A CFD, or Contract for Difference, is a financial contract you have with your broker to exchange the difference in price between the opening and the closing of a CFD contract.
When using crypto-CFD, you do not own the underlying coin; you’re simply taking advantage of its volatility. The great advantage is that you do not have to go through complex platforms and procedures to buy coins nor have to secure them with crypto wallets.
With CFD trading, you’re also using margin and leverage, which allows you to open larger trading positions than what your balance would initially allow you to. Therefore, you can trade larger amounts and potentially earn (or lose) more. Another great advantage of CFD derivatives compared to traditional markets is that you can profit from rising as well as falling markets, which means that you can take advantage of all market conditions.
So, how do derivatives affect the crypto market?
Derivatives usually draw more investors into the market, which tends to make the market more efficient and brings a certain level of growth in this market. That’s why many people think that crypto-derivatives have a globally positive impact on the crypto-market, as they act as a growth catalyst attracting an increasing number of diverse participants.
However, derivatives are often considered to be speculative products, which means that they can greatly impact the markets - especially in the short-term - and create impressive market movements. Some analysts think that because of derivatives, the crypto market can easily be manipulated, which slows down the overall adoption of cryptocurrencies.