Derivatives in the cryptocurrency market - icoinic
Andy Wong - Fundamental Analyst - Icoinic B.V.
Andy Wong

Derivatives in the cryptocurrency market

Cryptocurrency trading and investing are becoming increasingly popular. As more people are drawn to the young market, more financial products become available to both speculate on price movements as well as limit risk. These products derive their value from an underlying asset, the spot market, and are known as derivatives. Most of these are based on Bitcoin, but we can see that an increasing number of cryptocurrencies are targeted to have their own derivatives.

Derivative use

There are multiple derivatives available to trade on the cryptocurrency market. Each has its own advantages compared to simply trading the spot price. The derivatives that are available today are:

  • Futures
  • CFDs
  • Options
  • ETPs

Futures and CFDs usually have a lot more volume than normal spot markets, which has a number of benefits. It results in tighter spreads, increased liquidity, which in turn opens the market to bigger players. Futures and CFDs also allow market participants to hedge as shorting futures is possible. These products also allow for (Bitcoin) miners to lock-in the price of their future rewards. There are futures available that have expiration dates, but there are also perpetual futures. These perpetual futures make it easier to hedge and speculate for the longer-term. Swaps are often mentioned by exchanges, but this is a wrong term for the products as these are essentially futures as well.

Options are also available in the cryptocurrency market to both speculate and minimize risk for existing positions. For example, the downside can be protected with put options when simply having a long position in the underlying, but could also be extremely beneficial for miners. Instead of locking in the price with futures, the downside can simply be protected by buying put options without limiting the upside potential, to state the most simple strategy.

ETPs basically bring cryptocurrencies to the stock market while allowing the possibility to purchase a diversified product as these ETPs can be backed by a basket of cryptocurrencies. This possibility lowers the threshold for a lot of parties to get some exposure to cryptocurrencies.

Crypto versus traditional markets

What can be seen in the traditional markets is that the futures markets usually have a lot more volume than the spot markets. This is due to parties using the futures markets almost strictly for exposure without the need to actually settle the underlying with the ability to use margin. With commodities, for example, this would lead to additional costs due to transportation, storage, etc.

For now, there are fewer types of derivative products available in the cryptocurrency market than in the traditional markets. More products are expected to be added in the future as the market is still young and we are already seeing a lot of progress. A growing number of companies are entering the cryptocurrency derivatives market. As the market grows, companies will seek to fulfill the needs of participants with new products, creating new ways to hedge and speculate. This will aid in the maturing process of the market.


Many believe that derivatives are good for the cryptocurrency market as it will be easier to regulate, thus allowing new big players to enter the market. One of the reasons that it will be easier to regulate is the lesser threat of money laundering. Whereas parties on traditional exchanges can swap their cryptocurrencies for any other one that is listed on that exchange and then withdraw that cryptocurrency, this is not the case with exchanges that strictly offer derivatives, thus minimizing the risk of money laundering.

Since derivatives also lead to better liquidity and thus tighter spreads, there is less risk associated with investing in the market, which in turn is also positive when it comes to prospects of regulation.


The availability of cryptocurrency derivatives brings more liquidity and less risk to the market. Ultimately, this will be good for the market as the derivatives market is easier to regulate while the increased liquidity allows for more large players to enter the market.

Icoinic’s opinion

At Icoinic we believe that the cryptocurrency market will evolve towards a state like the traditional financial markets where the derivative markets are more liquid and where the price discovery happens.

We are always on the lookout for new possibilities to give our investors an edge and are also looking at the derivative markets for new ways to improve returns for our clients.