Derivatives in Cryptocurrency

A derivative is a financial contract between two or more parties based on the future price of an underlying asset.

financial derivatives discussed a lot when it comes to the crypto industry, especially regarding the futures contracts for Bitcoin or altcoins. It should be noted that the derivative is one of the oldest forms of financial contracts in the market This kind of history can be traced to ancient deal: In medieval times, the derivatives are used to facilitate trade between traders who traded throughout Europe and participate in periodic exhibition, the earliest form of the market in the Middle Ages.

Derivatives have evolved over the centuries to become one of the most popular financial tool. Currently, derivative is understood as security to get the value of the underlying asset or benchmark. the contract may be signed between two or more parties who want to buy or sell a particular asset at a specified price in the future. The contract value will therefore be determined by changes or fluctuations in the benchmark price gain value from.

Typically, the underlying assets used in the currency derivative (or cryptocurrencies), commodities, bonds, stocks, market indices and interest rates. Derivatives can either be traded on exchanges or customer-to-customer (C2C), which are quite different in terms of regulation and how to trade. Usually, however, active traders using both methods.

Why trader will use derivatives?

Derivatives are generally used to hedge risk or to speculate on the price of the underlying asset in the case of changes.

Derivatives are used in many areas but mainly for hedging purposes, ie when an investor wants to protect themselves from price fluctuations. In this case, signed a contract to purchase the assets for a fixed price would help reduce the associated risks. Another way to take advantage of speculative derivatives trading, as traders try to predict how asset prices may change from time to time. That is the reason why high-profile American investor Warren Buffet once called derivatives “financial weapons of mass destruction,” shared a common view that they should be blamed for the 2007-2008 global financial crisis.

There are many ways in which derivatives can be applied in real life. For example, before the crisis, the United States holding company Berkshire Hathaway began selling a put option on the four equity indexes, including a put option S & P 500 and the FTSE 100 is a form of derivative that gives the owner the right, but not the obligation, to sell assets the underlying for the put seller at a specified price on a predetermined date. In this case, Berkshire Hathaway offered investors the chance to buy premium options and therefore buy the ability to sell their shares at an agreed price and date. When the date finally came, they could earn money by selling stocks whose price has been seen to decrease. However, if the price has risen over a period of time, the company receives an option premium. In this case, Berkshire Hathaway took the risk and earned about $ 4.8 billion as a result.

Another interesting example of the use of derivatives comes from the flight business. As the flight was very dependent on jet fuel prices constantly see ups and downs, especially useful for businesses to implement strategies appropriate hedging derivatives. The world’s largest carrier, Southwest Airlines, which operates in the US, is a famous example of success in this area. Because hedging programs are well designed, the airline managed to lock in the price of crude oil at a very low level and therefore have to pay between 25% and 40% less for jet fuel than its competitors for years.

Some cases of use are nowhere near the traditional financial system. For example, there is a whole segment of weather derivatives is aimed at protecting farmers.

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