A long position means a trader believes an asset price will rise above the agreed futures contract price. Then, immediately sell the asset for a profit at the higher market price. Alternatively, you could take a short position with the aim of selling the futures contract before expiration, expecting its price to drop in value. If correct, the trader could buy the asset for below market value at the time of expiration.
It could be a trade of the underlying asset or cash-settled equivalent where the contracts are executed using fiat currencies or stablecoins. Cash settlement is most common with crypto derivatives trading rather than trading the actual underlying asset. It sparked interest in this style of trading and paved the way for a more user-friendly platform, BitMEX, to launch in 2014. Notably, BitMEX went on to invent the perpetual swap contract, which now dominates the market. Did you know? The first crypto derivatives exchange launched in 2012, just three years after Bitcoin’s invention.
A small market move against a leveraged position can result in significant losses or even a total loss of capital. This volatility can make derivatives positions highly unpredictable, causing traders to face sudden liquidation of positions or requiring additional capital to maintain margin levels. In leveraged trades, these rapid price changes can also cause slippage, further complicating risk management. Cryptocurrencies are notoriously volatile, with price swings of 10% or more in a single day.
Crypto Trading Volume
Hedging: If you own and trade spot cryptocurrencies, derivatives can be used for risk management in crypto trading. It protects you and helps you profit in downward markets without having to sell the underlying cryptocurrencies you hold. Did you know? Bitcoin derivative trends often drive underlying spot market prices. It quickly amplifies profits when you’re in the money. This allows you to borrow funds to increase your trade size. Some platforms provide leverage of up to 100 times. Commonly, this involves hedging against falling prices. Leverage: Derivative products. Exchanges offer margin trading in crypto. But losses can rack up just as quickly, leading to liquidation of your trades when using leverage in crypto derivatives.
When trading on derivatives exchanges, there is always the risk that the counterparty (the exchange itself) may face insolvency or operational issues. Unlike spot trading, derivative markets may have less liquidity, especially for more niche or exotic cryptocurrency pairs. Some derivatives platforms have insurance funds to protect against such events, but coverage may be limited. Can be banned or restricted in certain jurisdictions. Low liquidity can make it difficult to enter or exit positions at desired prices, leading to slippage and potentially forcing traders to settle at a loss or wait longer than anticipated to fill orders. Cryptocurrency derivatives trading is subject to regulatory scrutiny. If an exchange fails or is hacked, users may lose their funds.