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But smart contracts are not currently part of it all. Trace Mayer: So, with LedgerX they're physically settled into bitcoin or bitcoin derivatives on the block chain as opposed to tier exchange. They're cash settlements.
So you're getting dollars even if you bet on price of bitcoin or bitcoin derivatives going up. Paul Chou: I think there's a very big difference between cash settle contracts and physically settled contracts. You know, I think they both have their use cases. For us, our customers in the course of their business many of them actually need underlying bitcoin or bitcoin derivatives.
So having something that's physically settled is very important because some of their users will actually be interested in obtaining it at some point. So giving them the ability to hedge on a physically settled platform is really important for a lot of our customers. Trace Mayer: So just like a car manufacturer might need its commodity or somebody might want the physical gold or the physical silver from those contracts so likewise, you know, people can't eat dollars, but they can eat pork bellies or they eat cattle or they can eat weed, right?
So it's important to get actual underlying commodity settled or at least that's kind of your opinion on it. Paul Chou: Yes. So our opinion is that, again, both are very important. I think for a lot of speculative cases cash settled options or futures or other swaps make a lot of sense where you are only really interested in the kind of economic exposure of it. But there's also a huge category for physically settled. And I think one of the powerful things about bitcoin or bitcoin derivatives is that it's a lot more than just a price index to make bets on.
Once you actually have, whether you're an institution or otherwise or a company once you have access to underlying bitcoin or bitcoin derivatives what you going to do with it afterwards is tremendously broad and flexible. Trace Mayer: Former Commissioner Burt Chilton, he seemed to be very interested in the actual delivery in the gold and silver markets, for example.
And we've also got things that prevent or give excuses for not physically delivering. Like force majeure or duress. What are some of the conditions where people could be forced not to settle into their bitcoin or bitcoin derivatives , but actually have to receive dollars, for example? I mean, there are always these force majeure cases that could come up. You know, the most extreme one obviously is if the entire internet goes down. Then it's impossible to obviously broadcast a transaction to move anything on the block chain and so we have procedures in place so we could delay settlement.
Almost in every case, we won't -- you know, settlement in U. Trace Mayer: How about counterparty risk? Are people who open up these contracts then exposed to the counterpart risk of someone who's taking the other side of it? How does that work out? It's a great question. I mean, I think if you look at the ecosystem right now, the vast majority of trades in a lot of ways are done bilaterally over the counter between trusted counterparties.
So you might have a very big institution that, say, your second market and you have a trading desk. Many people are comfortable doing the second market and comfortable with that particular transaction.
Now, unfortunately there is always sort of a risk with bilateral transactions that counterparties would default which could leave you in a very exposed position from a risk point of view. So LedgerX's approach from the beginning was to also not just start an exchange, but have a clearing house attached to that exchange.
They'll be the central counterparty to all transactions and so you wouldn't face individual counterpart risk that you would with doing over the counter bilateral trades. Every single trade is novated and the clearing house guarantees those trades.
And I think that's very important because you no longer have to monitor the credit risks of all these multiple trading counterparties that you might have and you increase the size of the potential liquidity. Because now a lot of smaller players that bigger institution were unwilling to deal with before because they couldn't trust their credit essentially can now on the platform because the credit issue is mitigated.
Trace Mayer: You used an interesting term there, novation. In the context that we're talking about, what exactly is a novation? How does that impact legally the structures and the contracts that we're talking about? Paul Chou: Right. So, you know, Trace, for example, if you've signed up to LedgerX and I was on the platform as well, and you and I did a trade. Initially at the first moment of trade, you and I are facing each other in terms of risk.
So novation is a process where at the time the trade is completed before it's sent to the clearing house the counterparty is changed from each other to LedgerX clearing. So now you only face LedgerX clearing in terms of risk and I only face LedgerX clearing as well which increases stability of the market. Trace Mayer: So this is a way to just preempt the types of risks that we saw with Refco or with Herstatt Bank back in the 70's.
Paul Chou: Yeah, absolutely. I mean, I think a more recent example, if you look at during this turbulent financial crisis you saw that credit default swaps. They were always done bilaterally between large banks and institutions and as certain banks and institutions start to get weaker from a capital point of view the counterparty risk would increase and you are left with a position where multiple institutions face defaults against each other in a way that was very destabilizing for the financial system.
So a lot of the point behind Dodd Frank was to try to encourage a financial industry to go away from bilateral contracts and move more towards essentially clearing contracts and you know, that's the LedgerX approach as well. Paul Chou: Yeah, that's a great question. So, you know, sort of what you're discussing is that if you have counterparty risk with a certain swap sometimes you have to discount the value of the swap if your counterparties is in not great financial health because there's a less of a chance that they'll actually come through the trade, right?
So by centrally clearing and that's a very messy process, you have to make a lot of assumptions about your counterparty's credit worthiness and their ability to repay with you and especially if you have a lot of counterparties, then you're making a lot of assumptions. So you're right that regulators don't really understand the actual true risks and in a lot of these bilateral trades. Now for essentially clear trade, there's a lot of visibility because all the counterparties, there's only one counterparty for our transactions and it's a clearing house and because you have a central clearing house that regulators can now just go one point and actually audit the clearing house's financial stability to get a sense of how stable all the contracts are.
And at the same time, they also have visibility as to how big the positions are that all participants have because the clear house has records of all of that. Whereas with swap and bilateral trades it's a little bit more difficult to see whether there are enormous positions being taken and I think regulators want to see that you don't want to have a few players concentrating risk in such a massive way like we saw with JP Morgan-Whale London, for example.
Trace Mayer: And also impacting the ability of the auditors to get in a true or accurate assessment of the underlying assets that are on a balance sheet. For example, we could see real estate owned assets that are wrapped up in a swap and then swapped only for like a day period or even a 5-day period to appease the auditors and then it kind of comes back and if they're doing that with trusted counterparties that would be a way that they could obfuscate the true state of their financial condition.
Trace Mayer: Even to regulators, for example. But when we have the central clearing house that's going on, it's going to be much more difficult to engage in this type of accounting sorcery. You know, the central clearing house takes a lot of precautions to make sure that the records and position sizes in counterparties that own those positions are accurate and they reflect the true economic exposure that each of these participants have in a way that's very difficult to obfuscate.
So you know, the classic thing is we do extensive KYC on our customers. We don't need prevent things like the same customers signing up for two accounts and therefore having a misleading view. That's what their underlying risk is. So, you know, and the way that you would net it between the two prevent things like that from l happening and so I think a clearing house gives regulators one of the best most transparent and most economically sound views as to what participants are doing.
Trace Mayer: And what's actually going on with these contracts which given bitcoin or bitcoin derivatives 's volatility we could see really big changes. Particularly since there are only settled at the end of the contract term correctly. Paul Chou: Not many asset classes have that kind of volatility and those kinds of moves, yeah.
Trace Mayer: Do you see that type of volatility returning to bitcoin or bitcoin derivatives? I mean, what are we looking at in terms of the volatility of bitcoin or bitcoin derivatives? Is it going to return? Is it going to get crazy again? So this is one of those cases where volatility is a good thing for options contracts in particular.
You know there are a lot of types of derivatives, futures, forwards, others have some swaps. Options in particular can often benefit from volatility of bitcoin or bitcoin derivatives. I think one of the key beliefs here at LedgerX is that with a federally regulated U. And I think that particular phase, once that happens will probably encourage quite a bit of volatility in the price. You know, we've been following bitcoin or bitcoin derivatives for the last three, four years now and we've seen a lot of these phases where there's quite a bit volatility and interest in speculation and then periods of consolidation and just months where the price is stable which I don't necessarily think is a bad thing.
In fact, I think, to be very healthy for bitcoin or bitcoin derivatives in general. I think we're in one of those phase right now where there is a correction. And I think we're kind of consolidating at this phase. I think there will be other catalysts that come down the line that will bring volatility back into bitcoin or bitcoin derivatives.
Trace Mayer: Is there any reason why your contracts would not be able to settle into bitcoin or bitcoin derivatives? For example, we see with gold for gold markets that they can force cash settlement in some cases. The last time I checked there was plenty of gold above ground stockpiles. There should never be a shortage of gold.
It's just a function of price. So, likewise is there any reason why we wouldn't be able to physically settle these contracts with bitcoin or bitcoin derivatives? Paul Chou: No, not in my view. You know, I think that gold, oil and other commodities area examples are interesting because outside of the valuable supply issues, you can have delivery issues. With bitcoin or bitcoin derivatives , you know, in a lot of ways looks like a commodity.
Delivery is one the easiest parts of it. So we kind of just completely remove all those classic issues like commodity futures and commodity markets contracts used to have and that complete that side of things. So I think delivery of bitcoin or bitcoin derivatives and settling these contracts physically will not be an issue compared to other commodity markets. Trace Mayer: When I was down at the Miami conference one of the questions to the VC panel was, you know, does bitcoin or bitcoin derivatives have a killer app.
And I was the last one to answer. I said, yeah, bitcoin or bitcoin derivatives 's killer app is that it's no one's liability like gold. So when we're talking about being able to settle into something, do you think there's an importance there with bitcoin or bitcoin derivatives not being anybody's liability with it acting like a commodity but still having this transportability? I mean I think that's bitcoin or bitcoin derivatives 's greatest advantage. You know, it is like gold in that it's a commodity that's fixed in supply in a lot of ways.
But the transportability of it is incredibly convenient. The divisibility of it which is always been important for commodities that we're using sort of more monetary transactions. The precise ability to divide bitcoin or bitcoin derivatives to whatever precision that you want gives it a huge advantage in a lot of ways. Trace Mayer: Do you see other commodities and currencies eventually being settled into bitcoin or bitcoin derivatives? Like are we going to see gold to bitcoin or bitcoin derivatives swaps or oil or other commodities like that being traded like an oil-bitcoin or bitcoin derivatives contract?
Actually our internal view is that bitcoin or bitcoin derivatives will be very complementary to a lot of the other fiat currencies. So just like you have things settled into euros or yen or U. Trace Mayer: Now, all of this is great, but it has to be built on a solid foundation of security.
You know, if you're going to be physically delivering bitcoin or bitcoin derivatives s you got to make sure that they're secure. I've interviewed Michael Perklin from C4. They recently released crypto security standards, work they've done in conjunction with BitGo and Armory. Can you talk a little bit to that? Are the bitcoin or bitcoin derivatives s safe here at LedgerX?
These are European-style vanilla options that can be used either to maximize profits or to limit losses. Binance has a very reasonable fee for derivatives trading. There is no fee for the deposit of funds on Binance. The trading fee is variable and varies from 0. Further, a user can reduce this fee by holding the in-house token of Binance, i. The exchange is pretty secure and also has an option of two-factor authentication for users.
And customer support is also excellent. But you can still trade if you use a VPN. Bybit is a specialized platform that is dedicated to derivatives markets only. It has been in the market since What makes it a good platform is that its primary purpose is to cater for crypto derivatives trading. The trading fee structure of Bybit is pocket-friendly.
It charges 0. This makes it powerful for both individual and institutional traders. For user experience, Bybit is clean. There are a lot of essential educational resources for newbies to learn trading on the platform. FTX is a robust addition to the crypto markets and was established in May Please read our full review on FTX Exchange here.
FTX has non-inverted Futures Contracts, which are denominated in stablecoins. These are the futures contract through which you can bet on a real-world event. This is a digital form of traditional betting. All the options are priced on Black-Scholes Model. A user can buy a call or put open to hedge their market portfolio to substantial market deviations.
FTX futures are stablecoin settled: you deposit stablecoins as collateral for all of the futures, and your profit or loss is settled in stablecoins. This means that you get legitimate USD-based price exposure and settlement without needing a bank account; you can also use the same base currency as collateral for all of the contracts, making it easy to shift your positions around. FTX futures have a unique backstop liquidity provider program that jumps in to provide to accounts in danger of bankruptcy, helping avoid clawbacks.
The collateral for the futures contracts is in stablecoins. The USP of the exchange is its team with relevant and dynamic experience in the crypto and traditional trading sector. The team has ample exposure to the traditional secondary market.
Members have backgrounds in equity derivatives trading and seem to understand how derivatives are traditionally designed and what kind of derivatives are in demand. Deribit is another specialized exchange built only for trading crypto futures and options. It started in and has built a user-friendly platform for derivative traders.
Deribit is open to traders in over countries. There is no fee for a deposit, and withdrawal is also free up to a certain limit. These are European style vanilla options that can be used either to maximize profits or limit the losses. The platform only supports Bitcoin and Ethereum derivatives.
You can trade via its web portal or download its mobile application in Android and iOS versions. To trade, you need to create an account, make a deposit, and choose either futures or options trading. Their blog has helpful content if you get stuck. Bitmex is a popular crypto exchange where you can trade derivatives. It is another specialized derivatives exchange. Further, Bitmex also offers a margin of upto x on these contracts.
The point worth noting is that all these contracts are settled in BTC. Thus, withdrawals, deposits, and transaction fees are all done in BTC. Market takers pay 0. This is a refund given to makers for providing liquidity for the platform. It stands tall in the list of best crypto exchanges, and its derivative products are also not short of anything. In addition to the above, Gate. The platform offers perpetual contracts and various futures contracts. Huobi Global is one of the leading crypto exchanges that have huge liquidity.
In addition to this, the exchange is good on all security parameters. In addition to essential services such as spot and margin trading, Huobi has a substantial trading volume in the derivatives market. OKEx is a big name in crypto with support for many assets. It is one of the top exchanges for derivatives trading, according to CoinGecko. This means that they can either be settled in USD or cryptocurrency.
OKEx exchange offers perpetual and futures contracts. This huge variety of derivative products makes OKEx viable for traders who want to trade in Altcoin derivative products. Further, OKEx is one of the most liquid exchanges for derivatives trading. There is also a beginner knowledge quiz for newcomers going into futures and perpetual swaps. OKEx wants traders to come into their derivatives market with a little knowledge of how things work.
The quiz lets you learn margin calls, swaps, futures, funding, and withdrawal schedules on OKEx. Another cool part about OKEx is that it allows its Customer to pair derivatives trade with fiat currencies. This allows you to make a trade in a currency of your choice. MEXC Global is an exchange that brings a number of low cap gems at their incubation stage.
The exchange was established in in Seychelles, East Africa.
Enter your phone number or email address, then verify your number or email address. BitMEX is one of the best cryptocurrency exchanges and platforms. This web-based crypto derivative application offers a comprehensive API that helps investors to access financial markets using Bitcoin. OKEx is a cryptocurrency exchange that provides advanced financial services to traders globally by using blockchain technology. This crypto exchange offers hundreds of tokens to help traders to optimize their crypto derivative strategies.
Kraken is one of the most trusted crypto derivatives exchange companies. It offers financial stability by maintaining full reserves, relationships, and the highest legal compliance standards. It offers a wide variety of spot market pairs and derivatives, as well as betting markets. Skip to content. There are mainly four types of Bitcoin derivatives: Perpetual contracts: These contracts are a clone of crypto futures contracts. Traders can hold a position as long as they have enough funds.
Perpetual contracts are more suitable than futures trading for the people who needs to invest after every hour to keep the position open. Options: By integrating options into your derivatives trading exchange allows traders to buy or sell an underlying asset at the pre-determined strike price in the specific timeline. They may take a call or a put option. In options buying , traders are under no obligation to exercise the option as in the case of futures. They simply have an option at hand.
Swaps: Traders use swaps to exchange one type of crypto derivate with another. This helps them to earn profit at a fixed time later. Forwards: Forwards is nothing but resembles futures, however, with a difference. Forwards can be customized, unlike futures.
Forwards are generally traded through OTC over the counter , so you need to consider the associated risks. Imagine you want to speculate on the price of gold. You could go and physically purchase bars of gold and sell them when prices have moved up. However, that is almost impractical and costly as you would also need to consider storage and transportation fees. Here better approach would be to trade an instrument or contract whose price is indexed to that of gold instead.
These contracts are agreements that help you sign with an opposing party. It also helps you imagine that you are assuming the price will go up while another person believes the price will go down. You and another speculator can sign an agreement declaring that after a certain period when the price has moved in any direction, one party needs to pay the other the price difference.
Your counterparty bets it will go down. As you can see in such a deal or contract, an investor or trader can profit even when prices go down without having to own the underlying asset. Though this is how derivatives work in the context of trading, it comes with many unique variations in reality. It is important to search for the best crypto derivative exchange before you start trading.
Here are some important steps you need to check before selecting a crypto derivate exchange. Reputation: The best way to find out about an exchange is to search using various reviews from individual users and with the help of well-known industry websites. Trading Fees: Many crypto derivate exchanges should have fee-related information on their websites. Therefore, before joining, you need to make sure you understand deposit, transaction, and withdrawal fees. Trading fees might differ upon the exchange you use.
Payment Methods: You need to find out what payment methods are available on the exchange? Are they accepting Credit cards or Debit cards? All these details are important as if it has limited payment options, which may not be convenient for you to use them. You need to remember that buying cryptocurrencies with a credit card always demands identity verification. It also costs you a premium price. There is a bigger risk of fraud and higher transaction and processing fees.
Buying cryptocurrency using wire transfer will take significantly longer as it takes time for banks to process. Verification Requirements: The majority of Bitcoin trading exchanges require ID verification to make deposits and withdrawals. However, some trading exchanges also allow you to remain anonymous. Most of them ask for verification, which may take some time. It helps you to protect the exchange against all kinds of scams and money laundering. Geographical Restrictions: Some functions offered by cryptocurrency exchanges are only accessible from specific countries.
Trading in Bitcoin derivatives surpassed that of spot trading only recently as daily trade volume in both was about equal at the beginning of the year, although it should be noted that precise data from crypto exchanges is not easy to come by. At least one reason for the decline in spot trades relative to trading in derivatives is the presence of the Bitcoin whales , market participants who control about a third of the digital coins. These whales can have disproportionate impacts on price movements and contribute to illiquidity.
But a bigger reason for the shift to derivatives trading is the declining volatility of Bitcoin itself. But the traders looking for windfall profits that come from taking more risk are migrating to derivatives markets, making use of leverage to increase the potential gains in the absence of volatile price movements of the underlying.
Both BitMex and Binance offer Bitcoin futures contracts that can be leveraged more than times and often with no expiry date i. This is the reason why futures trading in traditional markets is higher than spot trading. But in traditional markets, derivatives are often used to hedge commercial transactions, which as of yet, are not all that common in cryptocurrency markets.
But for some, speculation is tantamount to gambling. In a large enough market, extended losses can have spillover effects into other financial markets and create the potential for a financial meltdown, which is why government regulators across the globe are taking a hard stance on crypto derivatives. Your Money. Personal Finance. Your Practice.
Popular Courses. News Cryptocurrency News. Key Takeaways Bitcoin derivative trading is outpacing Bitcoin spot trading. Bitcoin derivatives allowing traders to use leverage.