Bitcoin reached its second ATH in November 2021, clocking in an awe-inspiring 234.37% surge. Among the multiple factors that propelled the surge was the speculation as well as the launch of the first Bitcoin ETF futures contract in October 2021. Derivative contracts have been foraying into the crypto market for a while now and the trend signifies two main phenomena among many. One, the recent arrival of traditional derivative contracts in a seemingly new financial market like crypto signals that the fledgling market is approaching maturity. Another aspect is that exchange-traded crypto contracts are piquing up interest among institutional investors – thereby pulling in more investment into the crypto industry in general. learn more about smart contracts
So, how to choose the right exchange-traded crypto contracts? Well, for that, you need to gather a basic understanding of the different exchange-traded cryptocurrency contracts. But, before that, let’s have a few words about the concept of derivative contracts in the cryptocurrency scene.
Derivative contracts in the cryptocurrency
Essentially a major financial instrument, derivative is a contract that is tied to the value or price of a specific underlying asset- and not the asset itself. Based on this definition, a crypto derivative contract is a product that is anchored to the value or price of a particular cryptocurrency. A major benefit of derivative crypto contracts is that it enables you to invest in the crypto market without making lofty investments in a crypto coin.
There are two types of derivative contracts- OTC (Over-The-Counter) derivative crypto contracts and Exchange-traded crypto contracts.
The OTC crypto contracts are processed through P2P platforms or brokerage-dealer portals. These contracts are not traded via a regulated exchange. The exchange-traded counterparts, on the other hand, are processed through trading exchanges. Unlike the OTC option, the exchange-traded crypto contracts are always standardized and regulated. These derivatives are always guaranteed and settled via authentic clearinghouses.
Advantages of Exchange-traded crypto contracts
- Exchange-traded crypto contracts are always more secure than OTC crypto contracts as they offer standardized trading conditions
- Exchange-traded crypto contracts are always more credible because they are traded exclusively on regulated platforms
- With exchange-traded contracts, the exchange itself serves as counterparty to seller/buyer, thereby eliminating the unwanted default risk
Cryptocurrency, despite booming growth, still faces flak for its unregulated attributes that lead to extreme volatility. While the volatility factor has been pulling in an ever-growing number of investors and traders in the crypto scene- the same factor has been barring many from riding the crypto bandwagon. But, backed by a regulated framework, exchange-traded crypto contracts offer a feasible way to invest in the crypto industry yet under a comparatively more secured framework.
This air of security has eventually helped to attract more number of investors to the scene- including those who were initially apprehensive or incapable of investing in an unregulated market. It won’t be exaggerating to claim that the recent growth of the overall crypto industry is largely fueled by the rise in exchange-traded crypto contracts. In fact, the crypto derivative contracts market is making huge strides today and reached its peak in 2021, boasting a powerful figure of $4.96 trillion.
Types of Exchange-traded crypto contracts
The exchange-traded cryptocurrency contracts market has grown to $400 billion+ today.
When it comes to exchange-traded crypto contracts, you can choose from 3 main types, Futures contracts, Options contracts, and Perpetual Swap contracts.
Crypto futures contracts
Futures crypto contracts refer to a binding agreement or contract between a buyer and seller about purchasing and selling a particular set of underlying cryptocurrency- and that too on a fixed future time and date and at a fixed future price.
These crypto contracts help investors to keep the price fixed beforehand and that specific price won’t be influenced by market movements in future. One of the major reasons behind the popularity of futures crypto contracts is that they allow you to enjoy price stability despite volatile swings in the market in future. The first crypto future contract was a Bitcoin futures contract that was launched by two iconic Chicago-based trading exchanges in 2017. Call it coincidence or a positive influence, Bitcoin reached its first ATH the same year, after the launch of the first BTC futures contract.
The futures crypto contracts agreements feature these key aspects:
- The crypto asset involved
- Lot size of security
- Trade settlement process and date
- Price quotation
- Trading hours
- Expiration date of the contract
Crypto ETF futures
Mention must be made of crypto ETF futures here. These are crypto ETFs that work to keep tabs on price movements of a crypto token ( or a bunch of crypto tokens). Crypto ETF holders can be defined as companies or institutions that buy futures crypto contracts and extend a secured version to aspiring investors. Both retail and institutional investors can invest in futures crypto contracts or ETFs.
Crypto options contracts
These crypto contracts are almost the same as future price contracts. This contract is signed between 2 counterparties, there is a fixed price, and also a fixed future date for selling. But unlike the crypto contracts mentioned above, the options crypto contracts offer the opportunity to purchase or not to purchase the chosen asset.
There are 2 broad divisions when it comes to options crypto contracts. One is Call and Put- and another is American and European.
- Call and Put
The call options enable a crypto trader to buy the chosen asset on a fixed date. The put options enable a digital asset trader or investor to sell off the chosen asset on the specified date in the contract.
- American and European
If you choose the American option for option crypto contract trading, you will be able to sell off the asset before your options contract hits the expiry date. But, if you opt for the European option, you will have to sell only on the specified date.
Crypto Perpetual Swap contracts
The crypto perpetual swap contracts are also almost similar to futures contracts but there is a major difference. The only difference is that in a perpetual swap crypto contract, there is no clause of the expiration date. As a result, the price of perpetual swap crypto contracts is linked to the spot trading price of the underlying cryptocurrency.
Which one to choose?
Based on the discussions above, the crypto futures contract is probably the most standardized and ordered. If you want maximum standardization, go for the futures crypto contracts. But, if you are not sure about the purchase in future and want a flexible window, options cryptocurrency would be great. On the other hand, perpetual swap is preferred by investors and traders who don’t want the hassle of re-establishing a short or long trading position constantly.
No matter whichever contract you choose, make sure to register with a highly reputed and credible exchange.