Crypto Derivatives: Betting on Future Prices
Derivative is a financial instrument, the value of which depends on the value of the underlying asset.
What are derivatives?
Derivatives are extremely common and popular financial instruments. They are usually used to hedge risks. An investor who knows they want to buy an asset may sign a derivatives contract that obligates them to buy the asset at a certain price. This allows them to hedge against possible fluctuations in the value of the asset.
Nevertheless, derivatives are still finding use, and they are becoming increasingly common in cryptocurrencies.
Of course, cryptocurrency derivatives can be used by speculators to make profits, just like derivatives based on fiat currencies. However, the most important long-term benefit of the emergence of crypto derivatives is perhaps the aspect of risk hedging.
A crucial example is the massive launch of bitcoin futures in 2017. According to many in the crypto community, to achieve mass adoption as a store of value, bitcoin must offer investors a way to reduce risk.
Rapid price swings are a chance for speculators to make money, but they also irritate more risk-averse investors. The advent of bitcoin futures on the Chicago Board Options Exchange was a milestone for bitcoin because it offered institutional investors a way to hedge against these fluctuations.