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Crypto Derivative Effects on The Crypto Market



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crypto derivative is an agreement in which the value of the contract is based on underlying asset, collection of assets, which can be traded on an exchange or over-the-counter (OTC). Perpetual and quarterly futures are the most popular type of derivatives in the cryptocurrency markets, with conventional futures and options.

How crypto derivatives work

Crypto derivatives come in different forms, but they all involve a future purchase or sale of an underlying asset between two or more parties.

perpetual futures contract:  A future contract is a contract between two parties where both parties agree to buy and sell a particular asset of a specific quantity at a predetermined price, at a specified date in future. this is a financial contract that has an no expiration date or settlement, allowing it to be held or traded for an indefinite amount of time.

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Trading futures contract is a convenient way to speculate on the price of a financial asset. This allows you to trade a particular coin without having to own that coin.

Options: crypto options are derivatives used to buy or sell cryptocurrencies, at a preset price on a preset date. They are employed as a form of market risk and speculation insurance.

Derivatives effects on the crypto market

Crypto derivatives add volatility to the crypto market due to Institutional traders which have access to large volumes and can greatly impact the share price of a security and as such they have the capacity to trade more exotic products.

The well-known volatility of cryptocurrencies makes their liquidation a top target for traders and investors. In order to boost their margin size for prospective gains through derivatives (futures contracts), traders must leverage or borrow money, which increases their risk should the market move against their position..

With derivatives, you can access more leverage while hedging against market risk and speculative activity. Investors are forced to seek out large returns in the market, even when doing so entails greater risk, since institutional traders want to keep interest rates below inflation.

Don’t miss: How Investors Combat Inflation with Dollar Cost Averaging

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