â ď¸ Important: While leverage increases potential profits, it also raises liquidation riskâso itâs critical to understand how derivatives work before diving in.
What Are Derivatives?
A derivative is a contract between two parties based on the future price of an underlying asset. For BTC derivatives, this means:
Dynamic Value: The contractâs value changes as the underlying asset's price fluctuates.
Margin-Based Trading: You donât always need to hold actual BTC; instead, you post margin (collateral) and track your profit or loss as the price moves.
Key Motivations for Trading BTC Derivatives
Hedging: Protect an existing BTC position against unfavorable price movements, whether it is Bitcoin or the underlying asset (e.g., going short on futures if you own a lot of BTC).
Speculation: Aim to profit from short-term swings in BTCâs price by taking long or short positions, often with leverage.
Leverage: Control a larger position than your initial deposit, which can magnify both gains and losses.
Types of BTC Derivatives
While several derivative instruments exist, the most common in crypto markets include:
Futures: Contracts obligating you to buy or sell BTC at a predetermined price on (or by) a specific date.
Options: Contracts giving you the rightâbut not the obligationâto buy or sell BTC at a set price.
Note: Other instruments like swaps also exist, but futures and options are the predominant choices. At this moment, Roxom only provides perpetual futures.
BTC-Denominated vs. USD-Denominated Derivatives
BTC-Denominated Derivatives:
Margin and profit/loss (P&L) are settled in BTC.
Ideal for traders who measure their wealth in Bitcoin and wish to maintain BTC exposure.
USD-Denominated Derivatives:
Margin and P&L are settled in fiat currency or stablecoins.
Often chosen by those seeking less volatility in their profit/loss calculations.
Key Concepts Across BTC Derivatives
Index Price: A reference price derived from multiple sources (such as spot markets or CME futures) to ensure fair value. This keeps derivatives trading aligned with the real world prices.
Leverage: Enhances your buying power by using borrowed funds. For example, with 5Ă leverage, a 0.2 BTC margin can control a 1 BTC position.
Remember: Higher leverage magnifies both potential gains and potential losses.
Funding Rate (Perpetual Futures): A periodic fee, every 8 hours, where long positions pay short positions if the futures price is above the indexâor vice versa. This mechanism helps keep perpetual contracts closely aligned with the spot price.
Liquidation: The automatic closure of a leveraged position if unrealized losses approach your total margin. This process prevents negative balances and typically involves an insurance fund to manage any shortfall.
Unrealized vs. Realized P&L:
Unrealized P&L: âPaperâ profit or loss while your position remains open.
Realized P&L: The actual gains or losses recorded in your account once the position is closed.
Conclusion: BTC derivatives offer a flexible way to gain or hedge Bitcoin exposure, but they also introduce additional complexity and riskâespecially when leverage is involved.
Happy Trading!