Key Takeaways
- A derivative is a tradable financial contract whose value is derived from an underlying asset, such as a cryptocurrency. It allows traders to gain exposure to price movements without owning the asset.
- The two main types of crypto derivatives are futures and options contracts. Perpetual futures are a crypto-native innovation with no expiration date.
- Crypto derivatives are mainly used for hedging and speculation. They are complex instruments best suited for experienced traders.
What Are Derivatives?
Derivatives have existed since Babylonian times. They are tradable contracts that derive their value from an underlying asset. Today, derivatives are used across many financial markets, including cryptocurrency.
Derivatives allow traders to gain exposure to price movements of an underlying asset without actually owning it. In crypto, they have become an important market segment for traders, primarily used for hedging and speculation. Futures and options are two common types of crypto derivatives, and perpetual futures are a special type of futures contract unique to crypto.
As of March 2024, Crypto.com has started offering crypto derivatives to users in permitted regions via its app.
Common Derivative Contracts
Futures
A futures contract is an agreement between a buyer and seller to trade a specified underlying asset (like a cryptocurrency) at a set price on a predetermined future date. When the contract expires, the buyer is obligated to purchase, and the seller is obligated to deliver the asset.
In modern financial and crypto markets, physical delivery isn’t necessary. Instead, profits or losses are settled in cash to the trader’s account.
- Long vs. short: Buying a futures contract is going long; selling is going short. A long position profits if the market price at expiry exceeds the agreed price, and loses if it is below. A short position profits when the market price is lower, and loses when it is higher.
For example, Trader A goes long an ETH futures contract at $1,300, while Trader B goes short. For simplicity, we ignore margin and leverage.
- Margin: Crypto futures are traded on margin — traders put up only a fraction of the contract’s value, with the rest borrowed from the exchange. This creates leverage, which can amplify gains but also magnify losses. Traders may also face margin calls and forced liquidation.
(For more on margin calls, liquidation, leverage, and how margin trading differs from spot trading, see related guides.)
- Perpetual futures: These are a crypto-exclusive innovation. They work like standard futures but have no expiry date. Traders can hold positions indefinitely until they close them voluntarily or get liquidated due to margin issues.
(Further reading: Introduction to Crypto Futures and Trading Strategies for Futures Contracts.)
Options
Crypto options are contracts giving the holder the right — but not the obligation — to buy or sell an underlying asset at a predetermined strike price any time until the expiry date.
Call options and put options are the two main types. Both can be held long (bought) or short (sold). Options are leveraged because the premium paid is small relative to the contract value. Like futures, they can be cash-settled. The price the option buyer pays the seller is called the premium.
Long Call Option | Long Put Option |
Short Call Option | Short Put Option |
Before expiry, the holder decides whether to exercise. The key factor is the market price relative to the strike — determining whether exercising would be profitable.
Options are called In-the-Money (ITM), Out-of-the-Money (OTM), or At-the-Money (ATM) based on this relationship. The holder can also choose not to exercise at all, letting the contract expire and losing only the premium paid.
Contracts can be American style (exercisable any time before expiry) or European style (exercisable only on the expiry date).
Option payoff diagrams help visualize profit-and-loss scenarios. Take Jane as our hypothetical trader, with a strike price of $100 and a premium of $2.
- Long call: Profits when market price > strike + premium, because Jane could exercise and buy at the strike and sell at the higher market price. If below the strike, she does nothing and loses the premium.
- Short call: Profit is limited to the premium received. Losses occur when market price > strike + premium.
- Long put: Profits when market price < strike − premium, as Jane could buy at the lower market price and exercise to sell at the higher strike. If above the strike, she loses the premium.
- Short put: Profit is limited to the premium received. Losses occur when market price < strike − premium.
There is also a special knock-out option with predetermined floor and ceiling levels (barrier prices). If the underlying touches either level, the option automatically terminates (knocks out). This caps both potential profit and loss for holders and sellers.
(See also: Crypto Trading: Introduction to Options and Managing Risk in Crypto Options With Greeks.)
Use Cases for Crypto Derivatives
Crypto derivatives are used mainly for hedging and speculation.
- Hedging: A risk-management strategy aimed at reducing potential losses. For example, a trader buys BTC spot expecting a rise but wants to protect against a drop. A short BTC futures position would gain if BTC falls, offsetting the spot loss. A long put on BTC would work similarly.
- Speculation: Betting on price increases or decreases using long or short positions. Because derivatives use leverage, both potential gains and losses are magnified.
- Income: Traders sometimes generate income by selling options and collecting premiums, or by holding perpetual futures positions to receive funding rates — periodic payments between longs and shorts that some traders aim to capture.
Crypto Derivatives Summed Up
Crypto derivatives are complex, tradable instruments typically used by advanced traders. They derive their value from underlying assets — not just crypto but also stocks, bonds, commodities, and forex. Derivatives enable traders to gain price exposure without owning the asset, with futures and options being the most common types. They are primarily used for hedging and speculation. Suitability depends on each trader’s knowledge, skills, and personal circumstances.
How to Trade Derivatives on the Crypto.com Exchange
To trade derivatives on the Crypto.com Exchange, users must not be in a geo-restricted region. Follow the platform’s step-by-step guide to enable derivatives trading. Currently supported settlement currencies include USDC, USDT, DAT, BTC, ETH, and CRO, with more planned.