The past year was a big one for the growth of crypto derivatives because more institutions got involved and the market got more mature. At the start of the year 2022, the market for crypto derivatives saw a big increase in the number of trades. A report by cryptocompare on crypto exchange development said that around $3 trillion worth of crypto derivatives were traded in January 2022, which is a great start to the year.
Derivatives are complicated financial instruments whose value is based on an asset that they are tied to. Crypto derivatives trading happens when two people sign a contract in which they bet on how much a certain cryptocurrency will be worth at a certain time in the future.
This article talks about how derivatives are important to the crypto economy and why now is a good time to invest in the development of cryptocurrency derivatives exchanges.
Key features of Derivative Trading Exchanges
Some of the following things about crypto derivative trading exchanges might be helpful to know:
Stop losing money and make money
Traders can set the lowest and highest prices for their trades with both stop loss and take profit. So, based on the prices they set, they can automatically leave the market when things look good.
Partial close orders
With partial close orders, traders can take some profits while closing their orders in stages. This means that they can also keep making money from the growth of the market.
Auto deleveraging (ADL)
If a trader can’t sell a position at a better price than the bankruptcy price, the exchange’s ADL system can take away a trader’s opposite position. This is especially helpful if the insurance isn’t enough to cover any loss that might happen on the contract.
The insurance money
If a trader’s holdings fall below the maintenance level (margin), insurance funds help them keep their money safe from ADL
The rise of crypto derivatives is due to the following factors:
Crypto derivatives are important to a fully developed financial ecosystem because they do a lot of different things.
• Acts as a “liquidity facilitator”
In liquid markets, both the demand for and supply of assets are high. Crypto Derivates help control how much money is in the market. This makes transactions easier for longer because there are parties ready to trade at a certain time. Also, when there is more liquidity on the market, this type of asset is easier for traders to buy and sell. So, transactions happen under good circumstances, with lower costs and less slippage.
• Derivatives as Safe-Haven for Traders
When trading in crypto, the risks are high, but the profits can be surprising. All traders who deal in crypto derivatives do so to avoid risk. Crypto Derivatives protect a portfolio from crypto asset classes with a lot of volatility. For professional traders with a lot at stake, they act as a safe haven that keeps them from losing a lot of money all at once
• Made it easier to find prices
By letting investors go long or short, derivatives help find the best price. So, the ways that prices are found become more efficient, and changes in the market happen more smoothly. With the improved way prices are found, there are less price shocks and more confidence among market participants.
Main advantages of using Derivatives
Using crypto derivatives has some benefits, such as:
Because derivative trading uses arbitrage, it helps make sure that the prices of the underlying assets on the market are correct and that the market is stable and in balance.
Low costs of doing business
Risk can be managed well with derivative contracts, which lowers the costs of doing business on the market. So, transaction costs in derivative trading end up being lower than in securities like spot trading.
For example, if a trader buys a derivative contract and the price of the underlying asset goes down, he can make up for his losses by making money on his derivatives.
figuring out how much the underlying assets are worth
Most of the time, derivative contracts are used to set the prices of the assets they are based on. This makes them an important part of the cryptocurrency economy.
With derivatives trading, investors can use leverage to make more money without having to put up a lot of money right away.
The markets for trading derivatives are very busy because they are in high demand. Research shows that the daily value of crypto derivatives reached $600 billion in 2020. The market for derivatives keeps growing, and both institutional investors and traders are interested in them. This keeps the market active and liquid.
The prices of the underlying assets are taken into account by derivatives, which helps investors lower their portfolio risks. The market also gives signals about how the market is moving, which can help people make decisions about investments and trading strategies.
Given how important they are to the economy, it is clear that the area needs and should expect more infrastructure improvements. In the end, this means that more institutions will be developing crypto derivatives exchanges. Whether you are a new company or an old one, these signs show that now is the time to put money and time into developing derivatives exchanges.