How Derivatives Trading Works
Derivatives trading involves buying or selling of financial contracts which derive their value from performance of underlying assets like Bitcoin (BTC). Unlike spot trading where traders buy or sell the assets, derivatives trading allows traders to speculate on the future price movements of asset without directly owning it. BTC futures contract is a popular derivative used for trading, allowing traders to speculate on the future price of BTC. It can generate profit or loss depending on market conditions and price movements of BTC.
There are certain terms to consider when trading futures contracts, such as futures price, contract size, underlying asset, and expiration date. When a trader buys a BTC futures contract, he is agreeing to buy or sell the BTC at predetermined price known as futures price upon the contract expiration. Traders have two options: they can either sell the contract before the expiration date to close their position or allow the contract to be automatically settled at expiration.
At the time of buying contract, you do not own the underlying BTC. Instead, you are entering into an agreement to buy Bitcoin at a predetermined futures price at the contract’s expiration. You can close your position by selling the contract before expiration. Your profit or loss depends on the difference between the futures price (the price at which you agreed to buy BTC) and the market price of BTC at the time you close the contract or at expiration.
Selecting the Best Derivatives Exchange
Many crypto exchanges support both spot and derivatives trading though not all derivatives products may be available on every platform. When selecting a crypto exchange specifically for derivatives trading, consider several key factors: platform security, trading tools, risk management tools like stop-loss orders, leverage options, portfolio management features, and supported contracts. Risk management tools such as stop-loss orders, are very helpful when trading contracts. Additionally, analytics tools play a crucial role in making informed trading decisions. This review explores the top derivatives exchanges with robust security features, and comprehensive trading tools.
- Deribit
Deribit is a sophisticated derivatives exchange designed to streamline derivatives trading by offering advanced tools. It provides a diverse range of derivatives products including futures, perpetuals, and options contracts, and known to have the largest share in BTC options market. Deribit’s Options Wizard is an innovative tool that helps users find the best options trading strategy based on their price prediction. Another valuable tool is position builder which allows users to create and view multiple portfolios, enabling the execution of advanced trading strategies.
In addition to derivatives trading, Deribit supports spot trading for users who want to swap cryptocurrencies. The platform offers deep liquidity for both spot and derivatives assets, enhancing trading efficiency. To build trust and ensure security, Deribit has implemented a proof of reserves system and has earned an ISO security certificate, reflecting its commitment to robust security practices.
- BitMEX
BitMEX is a professional derivatives exchanges that provides deep liquidity for several contracts. Features such as fee discounts, and VIP services make this platform an attractive option for both spot and derivatives traders. The transaction fees are low compared to most of the derivatives exchanges. Users can get further discounts on fees by using BMEX, the native coin of BitMEX ecosystem.
Although the platform was launched in 2014, it introduced more features which expanded the BitMEX ecosystem. In 2016, it launched BTC perpetual swap contracts, leverage options, advanced order types, and introduced BMEX token in 2021. Interestingly, platform offers 100x leverage on some of its derivatives products.
- Bybit
Bybit is a versatile cryptocurrency exchange offering a diverse range of spot and derivatives assets. Users can efficiently trade both spot assets and derivatives contracts, benefiting from advanced tools such as a unified trading account and various order types, including limit and conditional orders. The platform provides up to 100x leverage on perpetual contracts, allowing traders to amplify their positions. Bybit’s unified trading account enables users to execute options, perpetuals, and futures strategies seamlessly.
For derivatives trading, Bybit offers two notable trading bots: the futures grid bot and the futures martingale bot, which automate trading processes. Additionally, Bybit provides DeFi services like staking. The platform is known for its industry-leading security measures, ensuring a safe and convenient trading experience.
- OKX
OKX is an advanced crypto exchange that supports both spot and derivatives trading. It is particularly suited for experienced traders who employ advanced trading strategies. The platform features a well-structured and unified trading interface, enabling both automated and manual trading. OKX offers several advanced order types, including conditional orders, which are valuable for automating the buying or selling of contracts based on predefined criteria.
Additionally, OKX provides trading bots such as futures grid and futures DCA, designed to exploit specific market conditions for potential profit. Overall, OKX delivers a comprehensive trading experience for both spot and derivatives trading.