Cryptocurrency derivatives are financial instruments whose value depends on underlying cryptocurrencies, such as Bitcoin or Ethereum. They allow traders and investors to profit from price changes without owning the cryptocurrencies themselves. The main types of derivatives include futures, options, and swaps.
One of the primary purposes of using derivatives is risk hedging. For example, if an investor fears that the price of a cryptocurrency may drop, they can enter into a futures contract that allows them to lock in the current price and avoid losses. This is particularly important in highly volatile markets where price fluctuations can be sharp and unpredictable.
Derivatives open up new opportunities for risk management, but they also require high expertise and thorough analysis.
