Derivatives are derivative transactions established based on contracts. This is one of the most popular forms of coin trading and is favored by traders. Below, Learn Crypto Trading will help you better understand this special product and the most effective way to trade.
What are Derivatives? Correct understanding of Derivatives
Derivatives translated into UK means derivative transactions. In the Crypto market, it has the same meaning as derivative products of stocks or forex.
Derivatives trade is based on a contract established between two subjects: the buyer and the seller. That contract will establish an assumption about whether the corresponding Crypto price will increase or decrease in the future. If the trader thinks the price will increase, he will place a Long (Buy) order or if he thinks the price will decrease, he will place a Short (Sell) order. When the time comes in the Derivatives contract that the price moves as predicted, the trader will make a corresponding profit on the trading volume.
Thus, the unique point of Derivatives is that when trading coins, traders can make profits in both directions of the market, up or down. The important thing is that you must predict its trend correctly.
Along with P2P transactions, Derivatives are considered a very interesting way to make money. It is also used as a risk mitigation tool for traditional crypto transactions. Today, Derivatives are gradually becoming a popular trend among many traders.
What does Derivatives market include? Diverse options for traders
Similar to the traditional derivatives market, the Derivatives market is also very diverse. Investing in these products, traders will have many options such as:
Futures contracts – Popular coin trading tool
This is considered one of the most popular ways to invest in Derivatives. With this contract, the trader will establish a trading contract with a fixed date in the future. Prices will also be set in advance. At maturity, both parties will execute the contract at the predetermined price. No matter what the market price is at this time, it does not affect transactions.
To better understand what a Derivatives transaction is in this case, you can see the example:
The trader chooses the Buy BTC coin order and sets up a futures contract. You set up a contract 3 weeks from now. The price you give is that you will buy BTC for 20,500 USD. At the right time 3 weeks later, no matter what the market price is, you must execute the Derivatives contract, paying the exact amount equivalent to the volume ordered.
See more: What is crypto? Discover what the world of Crypto
Typical Derivatives with forward contracts
Futures contracts are also a way to trade coins with Derivatives. A type of contract established to buy or sell coins at some point in the future at a current price.
For example, the current price of BTC is 20,000 USD. After 2 months, the BTC price may have 3 scenarios:
- Keep the price at 20,000 USD
- Discounts lower than 20,000 USD
- Price increase higher than 20,000 USD.
Trader establishes a Derivatives futures contract with the exchange. Buy 100 BTC at the current price of 20,000 USD, valid for 2 months. After 2 months, there will also be 3 scenarios:
- BTC price remains the same: Contract liquidated, neither side owes anyone else
- BTC price increases to 20,500 USD: Exchanges have to pay the buying price difference of 500 USD/BTC. Traders who buy 100 BTC will receive a profit of 5,000 USD.
- BTC price dropped to $19,800. Traders suffer losses and must pay the corresponding loss of 200 USD/BTC to the exchange, equivalent to 100 BTC which is 2,000 USD of loss.
Options contracts, swap contracts – The derivatives market has many advantages
Options contracts and swap contracts are also traded coin products that are popular with many traders. In the Derivatives market, traders can choose optional options to buy or sell a coin asset at a pre-specified price. The time of purchase and sale can be before or on the contract expiration date.
In this case, traders can choose to trade or not if the price at that time is not favorable. At this point, they can cancel the contract and lose the deposit fee they paid when entering the contract.
No matter which form you choose, traders need to carefully research the Market cap to optimize the transaction. This is a measure for traders to determine the value of that coin and make trading choices to Buy or Sell by its development situation and potential.
What is margin trading in derivatives? Make good use of it to increase investment performance
In Derivatives trading, margin trading is a term that traders need to know. All derivative products on the Crypto market are margin trading. Margin Trading is a deposit and through it, traders can use leverage.
Leverage is a tool for investors to increase profit margins without having to spend capital to perform Derivatives transactions with corresponding volumes. Thanks to leverage, traders only need to deposit about 10% or less of the total trading volume.
However, leverage also has its risks. Therefore, traders should only take advantage of transactions with thorough analysis and evaluation of the Derivatives market.
See more: Opening MEXC global account in detail, quickly
Instructions for trading and trading coins with the derivatives market
Derivatives are considered by many experts to be a new step in the Crypto market. So how do you trade them? For example, you already have a trading account at MEXC and have deposited a deposit to be ready to trade. Below are 2 simple steps for new traders to trade coins with derivative products:
Step 1: Choose trading product
At the main interface of MEXC, traders click on Derivatives. On the left of the screen will be all the products of this market. You choose the product you want to trade. Here, we choose ETF. After selecting, ETF funds will appear for traders to choose from. You also need to tick the box to agree with the derivative trading terms and conditions that MEXC offers.
Step 2: Proceed to set up buy or sell transactions for Derivatives contracts
After completing the transaction setup, traders also need to pay attention to market fluctuations to have directions for handling transactions if the market fluctuates as expected.
Note to keep your investment in Derivatives safe
- Make sure you clearly understand the margin requirements, leverage, and deposit information in Derivatives. Ensure your ability to pay at the end of the contract.
- During the Derivatives contract, if the amount of money in the account is lost and falls below the margin level, you need to quickly top it up. If your account is burned, the transaction will not continue. For example, you set a contract period of 2 months. During those 2 months, transactions will be calculated by day. The market will have short waves so fluctuations are very understandable and you must be prepared to compensate for margin when needed.
- Choose exchanges that support Derivatives trading to participate. For example, OKX, ByBit, MEXC, HTX…
Conclude
Derivatives trading is considered a risk-balancing tool when trading coins in the base market. Investors can consider choosing one or more derivative products in the market to participate. Along with that, continuously update the latest investment information from Learn Crypto Trading to gain more trading experience and quickly conquer the market!
FAQs
Can a derivative contract be terminated before payment is due?
Okay. Traders can consider market conditions to process transactions.
Can I own tokens or coins when trading in the derivatives market?
No, investors only rely on price fluctuations of coin assets and establish short sales contracts, so they do not own real assets.
What is the maximum leverage level when trading derivative coins?
Not determined but will depend on the conditions of each exchange.
