The mechanics are similar to futures, except that perpetual futures do not have an expiry date. Also check out Trading Strategies for Futures Contracts. A trader can hold the contract for as long as they wish until they close the position of their own accord or are forced into liquidation due to margin issues, for example. Crypto options are a type of crypto derivative contract agreement that gives the holder the right (i.e., the option), but not the obligation, to buy or sell a specific underlying asset (such as a cryptocurrency) at a set price (referred to as the strike price) up until a set future date (also known as the expiry date). Learn more about futures in Introduction to Crypto Futures.

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Crypto derivatives are complex, tradeable financial instruments typically used by advanced traders. Whether or not crypto derivatives are suitable depends on the knowledge, skill, and personal circumstances of each individual trader. Two common types of crypto derivatives are futures and options, and they are used mainly for hedging and speculation. They derive their value from an underlying asset, such as (but not limited to) cryptocurrencies, stocks, bonds, commodities, and forex. Crypto derivatives contracts allow traders to gain exposure to the price movement of a digital asset without actually owning the asset.

Instead, the profit or loss resulting from the trade would be posted to the trader’s account (this is sometimes referred to as cash settlement). They take a loss when the market price is below the set price. Long positions profit when the market price of the asset is higher than the set price at the expiry date. Long vs Short – Buying futures contracts is referred to as entering a long position, while selling futures contracts is referred to as entering a short position.

Options to generate income. For example, sellers of options receive premiums from the buyers. In crypto perpetual futures, there is a mechanism called funding rates, where sometimes traders who are long have to pay those who are short; at other times, short traders have to pay those who are long. Therefore, some traders may enter into crypto perpetual futures positions to receive this funding rate. Options to generate income. Traders sometimes use futures.

For the sake of simplicity, we ignore the effect of margin and leverage. Instead, a portion of the funds is borrowed from the exchange or trading platform. This allows for leverage, which could amplify gains, although losses could be amplified too. The trader might also potentially face margin calls and forced liquidation. Margin – Crypto futures are traded on margin, which means traders do not have to pay for the full amount of the trade themselves. Perpetual Futures – These are a type of futures contract unique to the crypto market. Learn more about margin calls, liquidation, leverage, and how margin trading differs from spot trading.