Derivatives
financial instrument
Derivatives are financial contracts whose value is based on the price performance of an underlying asset, index, or rate. They enable traders and institutions to speculate, hedge, or manage risk without needing to hold the actual asset. In crypto and traditional markets alike, derivatives offer flexible exposure to assets like Bitcoin, Ethereum, commodities, stocks, or interest rates ÔÇö with positions often amplified through leverage.
Use Case: A trader may use Bitcoin futures contracts to speculate on BTCÔÇÖs future price without holding spot BTC, or to hedge an existing position against downside volatility.
Key Concepts:
- Futures ÔÇö Contracts to buy/sell at a future date and price
- Options ÔÇö Contracts giving the right (not obligation) to buy/sell
- Perpetual Swaps ÔÇö Futures with no expiration, commonly used in crypto
- Leverage ÔÇö Borrowing capital to control a larger position
- Hedging ÔÇö Reducing exposure to potential losses
- Speculation ÔÇö Betting on price movements for profit
- Margin ÔÇö Collateral used to open and maintain positions
Summary: Derivatives provide powerful tools for risk management and advanced trading strategies ÔÇö but also carry elevated risk due to leverage and price volatility. They separate ownership from exposure and are a core element of both institutional finance and DeFi protocols.