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Derivatives Meaning

Mar 26, 2023 | Updated May 24, 2023
Derivatives are products or contracts that obtain their value from an underlying asset like stocks, bonds, commodities, or cryptocurrencies.

What Are Crypto Derivatives?

Derivatives are financial instruments that derive their value from underlying assets, hence the term ‘derivatives’. Through derivatives, traders can gain exposure to the price fluctuations of an underlying asset without possessing it directly. In traditional financial markets, these are assets like stocks or bonds, while crypto derivatives derive their value from cryptocurrencies. 

When trading derivatives, two parties – buyers and sellers, enter into a contractual agreement that obliges them to buy or sell an asset at a predetermined future date.

Derivatives are frequently utilized to hedge against risk. An investor who plans to purchase an asset may opt to sign a derivatives contract that establishes a fixed price for the asset. This method aids in safeguarding against potential fluctuations in the asset’s value.

One of the reasons for the popularity of derivatives is their ability to safeguard portfolios from unexpected risks resulting from high volatility in cryptocurrency prices. A robust derivatives market is attractive to investors as it reduces the risk of portfolio exposure to bear markets.

Futures, Options, and Perpetual swaps are the three popular types of cryptocurrency derivatives.

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