Why Crypto Futures Are Better Than Traditional Derivatives?
Traditional futures are financial contracts whereby two parties agree to buy and sell a specific commodity at a predetermined price on a set date. It’s akin to a bet, where one party speculates that the price will rise while the other predicts a decline. The losing party is responsible for covering the price difference.
Choosing futures offers several advantages over directly purchasing a commodity. Notably, it enables trading and speculation without the need to possess the actual asset. In the commodity market, this means trading futures on containers of corn without owning or storing them. Similarly, in the crypto market, futures allow traders to make transactions without setting up a coin wallet or worrying about safeguarding their crypto assets.
What Are Crypto Derivatives
A crypto derivative is a financial contract that applies the principles of traditional derivatives to crypto assets. These contracts derive their value from cryptocurrencies like Bitcoin.
Crypto futures contracts involve an agreement where the buyer commits to buying a specified cryptocurrency (e.g., Bitcoin) at a predetermined price on a future date, regardless of any decrease in its value. Similarly, the seller is obligated to sell the asset at the agreed price, even if its value has increased. This can be highly beneficial for investors seeking to leverage the volatility of the crypto market.
Benefits of Crypto Futures Over Traditional Futures
While traditional derivatives primarily involve hedge funds, commercial banks, and institutional players, the current crypto derivatives market is predominantly driven by retail investors. However, the landscape is gradually changing as more institutions enter the crypto derivatives space. Despite this shift, the market still maintains a focus on retail investors, especially with the emergence of decentralized derivative platforms. Here are several advantages of Crypto futures over Traditional futures.
24/7 Trading time: Unlike traditional derivative markets, crypto derivative indexes pull data from markets that are open 24 hours a day, seven days a week. This allows for longer trading periods for investors in various time zones.
Safety: Crypto Futures markets provide enhanced safety for traders due to the implementation of position and price limits in their contracts. These limits effectively reduce the risk exposure for traders, making it a safer option compared to other forms of trading.
Innovation: The rapid growth of DeFi has led to the emergence of new financial projects in a matter of days. Crypto derivatives projects, whether revolutionary or built upon existing ones, constantly iterate to meet market demands. In contrast, traditional derivative products are slow to adapt, resulting in fewer innovations compared to their crypto counterparts.
Flexibility: Crypto Futures contracts offer traders greater flexibility in their trading strategies. For example, traders can easily take short positions on assets they expect to decrease in value, which is more challenging in spot or margin trading. This flexibility also enables the execution of scalping strategies, which are less effective or efficient in the spot market.
Custodian Requirement: Unlike traditional derivatives markets that rely on custodians or central clearing counterparties, crypto derivatives generally do not require custodians.
While some centralized derivative exchanges are attempting to emulate traditional markets in this regard, decentralized derivatives exchanges eliminate the need for central parties entirely. They democratize the crypto derivatives trading market and effectively mitigate counterparty risk through robust smart contract designs.
Price Accuracy: Crypto Futures contracts, unlike Traditional Futures contracts, are perpetual and do not have an expiration date. This perpetual nature allows crypto futures to closely track actual spot prices with minimal divergence.
While traditional futures contracts often trade at a premium or discount based on market sentiment, perpetual crypto futures contracts incorporate funding rates to ensure alignment with spot prices. Consequently, these contracts trade in line with the current spot prices, enhancing price accuracy.
Wrapping Up
Crypto futures trading presents both advantages and disadvantages. One of the key benefits is leverage, which can amplify profits. However, it also carries risks and can become a double-edged sword. Inexperienced traders may be susceptible to over-leveraging, leading to potential loss of capital if their trades go against them and they get liquidated by the exchange. Proper research and due diligence are crucial before entering this market.
Nevertheless, the advantages outweigh the risks, and with adequate knowledge and understanding, it can be a relatively safe and profitable way to work with the market.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.
