Derivative Definition
In the context of cryptocurrency and blockchain, a derivative is a financial contract between two or more parties based upon the future price movements of a crypto asset. The value of these contracts is derived from the performance of an underlying cryptocurrency, which can vary between bitcoin, ethereum or any other digital currency.
Derivative Key Points
- Derivatives are financial agreements whose value is determined by an underlying asset, which in this case is a specific cryptocurrency.
- They are used to hedge risk, speculate on future price movements, or to gain access to assets that may be difficult to trade directly.
- Common forms of crypto derivatives include futures, options, and swaps.
What is a Derivative?
A derivative is, in essence, a special type of contract that is primarily used in the financial markets. Its value is based not on its own inherent worth, but on the future price movements of another asset. In the cryptocurrency industry, these underlying assets are typically digital currencies like Bitcoin, Ethereum, or Litecoin.
Why are Derivatives important?
Derivatives play a crucial role in the financial market as they allow investors to mitigate potential risks associated with price volatility of the underlying asset. They are also used for speculative purposes, allowing investors to profit from predicting future price movements of the cryptocurrency.
When are Derivatives used?
Derivatives can be used at any time, but they are particularly useful in volatile markets – like the cryptocurrency market. Hedgers use them to reduce the risk of adverse price movements in an asset, while speculators use them to bet on the future direction of price movements.
Who can use Derivatives?
While derivatives were traditionally used by professional traders and investment institutions, the introduction of cryptocurrency derivatives has opened them up to a wider audience. These days, anyone with an interest in the cryptocurrency market and an understanding of the risks involved can engage in derivative trading.
How do Derivatives work?
Derivatives work by forming a contractual agreement between two or more parties about the future price of a particular cryptocurrency. They come in different forms, including futures, options, and swaps. The contract will stipulate specific terms, such as the price and expiry date. The parties involved are then obligated to abide by these terms, regardless of how the market price of the crypto asset changes.
