A derivative is an asset that achieves its value through tracking the price movements of another underlying asset. In the cryptocurrency space, the current, most-popular derivatives are futures and options, both of which allow you to bet on the future prices of assets like Bitcoin or Ether, as well as many others.
What are the major risks of crypto derivatives?
Essentially, the major risks of crypto derivatives can be summed up by saying that unless you're an experienced derivatives trader, trading in derivatives generally isn't advisable. Because most derivatives equate to bets in a regulated environment on the future movements of an asset or market, trading in them carries the risk of losing everything you've put in.
Because the crypto space is still far more of an early-stage market than the global stock, bond, or commodity markets, the risk of derivatives markets being manipulated by traders with deep-pockets is also significantly higher.
How do traders use derivatives?
Traditionally, the main use case of derivatives for traders is as a hedge against possible future bear markets. This refers to the fact that if one occurs, the holder of a derivative can sell its contract, which helps them to recoup any losses they might be anticipating(or have already experienced).
It goes without saying that none of this should be construed as an endorsement of derivatives one way or another. At NBX, we simply aim to educate everyone about all aspects of cryptocurrency investing.