5 Reasons why Derivatives are the key for crypto adoption
Crypto is an industry that is generally perceived as a young one that has plenty of room for future growth. Especially for institutional money, which is needed to expand the crypto industry further and is essential for crypto's long term existence, as they provide the capital needed to see solid projects develop into maturity. This in turn will contribute to the industry maturing, and that is a good thing.While spot trading (holding the underlying asset) has its values, derivatives (derives value off spot price) are more complex but provide more flexibility when getting involved in the markets. Here is why:
More trading strategies: Derivatives allow for more diverse trading strategies. For example, crypto options allow traders to create a basis to speculate on volatility. Crypto futures allow traders to create a basis trading strategy by buying and selling a future against it to capture the interest from the difference between spot and future against it to capture the interest from the difference between spot and future
Higher capital efficiency:
Margin allows traders to hold positions with margin, meaning they can more efficiently allocate capital across multiple markets and products. By using margin, one effectively trades on leverage. When used correctly this can help diversifying into multiple assets, while running the same risk profile, as only a fraction of the portfolio is needed to get into a position.
Better risk management Derivatives allow one to trade short and therefore one may use futures to hedge the potential risk against their spot holdings which are long by definition.
Simplicity: Derivatives mean that you are trading an instrument that derives its value from the underlying spo t price. This means that own the actual asset. Depending on your strategy, this can have favorable aspects. Cash settled derivatives allow investors to gain direct exposure to crypto without owning crypto assets and worrying about custody.
Tax efficiency: In some jurisdictions, derivatives trading carries tax benefits. For example, in the US, 60% of gains on derivatives contracts are taxed as long-term capital gains regardless of the duration of the contract, making derivatives an attractive trading instrument.
Want to read more about derivatives? Read our previous articles by following the links below:
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The information provided above is not financial advice but for educational and entertainment purposes. Please do your own due diligence or consult a financial advisor before investing in any digital assets.
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