What are Bitcoin derivative exchanges?
What are Derivatives?
First, let us look at what derivatives are. Derivatives are financial securities tied to other financial assets. Therefore, the value and behavior of the derivatives depend on the value and behavior of the assets there are tied to.
For a derivative to be formed, there has to be an agreement between two parties of two financial assets. The value of the derivative depends on the exchange rate between the two financial assets in question. Derivatives were actually introduced through the Contract for Difference (CFD) trading.
Some derivatives are solved over the counter in an unregulated manner while others are sold on exchanges, which are regulated.
We have looked on what derivatives are and we shall now look at Bitcoin derivatives.
A Bitcoin derivative is simply financial security tied to Bitcoin (BTC). An example is BTCUSD. In this case, the two parties involved are the US dollar and Bitcoin. Therefore, the value of the BTCUSD derivative will depend on the exchange rate of the US dollar and Bitcoin.
Currently, there are lots and lots of Bitcoin derivatives which are based on Bitcoin and other assets, mainly fiat currencies, commodities, and indices.
Bitcoin Derivative Exchanges
Some years ago, cryptocurrency traders could only buy cryptos and sell them via the cryptocurrency exchanges. The users used to buy certain crypto coins, hold them for a while and then sell them when the prices hike. However, that is too risky since some blockchain projects are offering ICOs and the value of the tokens/crypto coins could drop if the projects fail to pick up. Also, the prices of cryptocurrencies are very volatile and buying and selling crypto coins on their own could require huge investments which could be lost if an investment turns against you.
Then, with time, due to the CFD, trading platforms were able to come up with a better way of trading cryptocurrencies and this was by trading their derivatives.
At first, when the exchange/trading platforms announced that they would be offering cryptocurrency derivatives, people were not very sure about them and it took a while before accepting them. Today, almost every cryptocurrency exchange is offering derivatives.
Bitcoin being the leading cryptocurrency has earned itself a lot of respect from financial institutions and exchanges can also not help but offer as many respective derivatives as possible since they are sure these financial instruments will attract customers. The most traded Bitcoin derivatives are those pegged to the major currencies.