With increased regulation and acceptance, a plethora of financial services and investments involving cryptocurrencies is now emerging. Literally thousands of cryptocurrencies now exist, each of which offers its own appeal and target audience. While some may choose to use these currencies to buy and sell various items, others are investing just like they would through standard shares, commodities and futures.
One such trading option is cryptocurrency derivatives. Many who feel like cryptocurrencies are confusing will likely feel even more so toward cryptocurrency derivatives. As such, let’s look at the basics of trading these derivatives in today’s financial markets.
What Are Cryptocurrency Derivatives?
Many people feel confused when hearing discussions about cryptocurrency derivatives. In reality, it’s a pretty simple concept: cryptocurrency derivatives involve a contact between two parties. This contract involves buying or selling one or more forms of cryptocurrency at a particular point in the future (and for a particular price).
Your Options for Trading Cryptocurrency Derivatives
There are a few different methods for investors and speculators to trade cryptocurrency derivatives, with each involving its own amount of risk, timing and knowledge.
An increasingly popular form of trading cryptocurrency involves contract for difference (CFD) trading. Arguably one of the biggest advantages to CFD trading is that you can trade or speculate without assuming ownership of the assets in question. This allows for both buying and selling of cryptocurrency. Established brokers such as easyMarkets allow for easy CFD trading.
Trading cryptocurrency futures involves the buyer assuming an obligation to purchase the currency at a particular date and for a specific price. This is a popular form of trading often used by those who feel a currency’s value is clearly headed in one direction or another.
Cryptocurrency options trading is a bit more flexible. This method allows buyers and sellers to enter into an agreement where they will have the option – as opposed to a requirement – to buy or sell a particular amount of cryptocurrency for an agreed-upon price.
There are also other niche options available for trading cryptocurrencies – especially the more popular ones – but these three options are among the most common when trading derivatives.
Why Trade Cryptocurrency Derivatives?
Many with experience in cryptocurrency remember the old days where buying and selling the currency itself was the simplest form of trading. However, times change – and with more regulation comes more options for trading.
Cryptocurrency derivative trading can provide some protection from the volatile nature of the markets, depending on the exact method used. By minimising risk exposure, profit may also be lowered – but losses are minimised as well.
For those who do love to speculate, derivative trading is actually better than acquiring ownership of the cryptocurrencies themselves. This can reduce potential loss when handled properly and ensures you remain as “liquid” as possible when trading.
Somewhat related to volatility in the cryptocurrency markets, utilising derivative trading can also help hedge your broader investment strategy. Hedging involves actions taken to minimise any potential losses that occur elsewhere. As such, those who are speculating or investing in a wide variety of commodities can benefit from trading cryptocurrency derivatives.
Given the increased oversight and regulation, cryptocurrency trading isn’t the same untamed jungle it was in the past. With a wide variety of trading options now available, investors can take advantage of trading options like derivatives trading to maximise their earnings while also minimising both risk and long-term commitment (depending on their exact investment strategy).
This post was originally published on Crypto Coin Guardian