Derivative (Cryptocurrency)
A derivative is a financial instrument that derives its value from an underlying asset or index. In the cryptocurrency space, derivatives are contracts between two parties that specify conditions for exchanging cryptocurrency at an agreed upon price and date in the future. Derivatives products allow investors to speculate on the future movement of prices without having to own the underlying asset.
Types of Cryptocurrency Derivatives
The most popular type of cryptocurrency derivatives include options, futures, forwards and swaps. Options give buyers the right (but not obligation) to buy or sell crypto assets at a predetermined price by a certain time in the future. Futures are similar to options but require both parties to make good on their agreement regardless of market conditions when they expire. Forwards involve entering into a contract with another party where one agrees to purchase/sell an asset at some point in time at a predetermined rate even though it may not exist yet as physical currency or tokens currently trading on exchanges. Swaps involve swapping rights/obligations between two parties instead of buying/selling them outright and can be used for hedging purposes against other investments with higher volatility such as cryptocurrencies themselves or stocks related to blockchain technology companies.
Margin Trading & Leverage
In addition, margin trading allows investors to trade with borrowed funds from third-party lenders for additional leverage on their trades which increases exposure but also carries more risk due liquidity issues if markets move too quickly against them before they can exit positions successfully. Margin calls occur when losses exceed allowed thresholds set by brokers who facilitate these trades; forcing traders either add more capital or reduce size until equilibrium is reached again in order for transactions remain open and profitable over longer periods without being subject liquidation orders placed automatically under certain circumstances dictated by exchange rules governing margin accounts respectively held thereon behalf individual customers using them speculatively day-to-day basis throughout given day(s).
