How Does a ‘Derivative’ Differ from the Underlying Cryptocurrency Asset?
A derivative is a financial contract whose value is derived from an underlying asset, which in this case is the cryptocurrency. The derivative itself is not the asset; it is a contract to buy or sell the asset at a future date or price.
Derivatives allow for hedging and speculation without requiring ownership of the underlying asset, unlike the direct ownership of the cryptocurrency.
Glossar
Speculation
Objective ⎊ Speculation involves taking positions in financial derivatives based on forecasts of future price changes, aiming to generate profits from short-term market volatility.
Future Date
Maturity ⎊ The future date, also known as the expiration date or maturity date, specifies when a derivatives contract ceases to exist or requires settlement.
Hedging
Mitigation ⎊ Within cryptocurrency derivatives and options trading, mitigation represents a proactive strategy designed to curtail potential adverse exposures arising from market volatility or systemic risk.
Direct Ownership
Ownership ⎊ This signifies the absolute right to control and dispose of a digital asset, typically established through exclusive possession of the corresponding private cryptographic key.
Financial Contract
Agreement ⎊ Financial Contract in the crypto derivatives context is the legally or programmatically binding agreement, often embodied in a smart contract, that defines the rights and obligations between counterparties regarding a future cash flow or asset exchange based on an underlying reference price.
Cryptocurrency Futures
Leverage ⎊ Cryptocurrency futures contracts represent agreements to buy or sell a specified quantity of a cryptocurrency at a predetermined price on a future date, functioning as a derivative instrument.