Derivatives

In the context of cryptocurrency, derivatives are financial contracts whose value is derived from the price of an underlying asset, such as Bitcoin, Ethereum, or other cryptocurrencies. Common types include futures, options, and swaps. These contracts allow traders to speculate on price movements without directly owning the underlying asset.

How Derivatives Work

For example, a futures contract locks in the price of a cryptocurrency for a future date, allowing traders to profit from price changes. Similarly, options give the right (but not the obligation) to buy or sell at a predetermined price. Swaps are agreements to exchange cash flows based on different asset prices.

Benefits and Risks

Derivatives offer opportunities for hedging, speculation, and portfolio diversification, but they also come with risks. They can amplify both gains and losses due to leverage, making them more volatile compared to trading the actual assets.