derivatives trading

Investment Expansion: Why Derivatives Trading Wasn’t Possible For Cryptocurrencies… Until Now!

Investment Expansion: Why Derivatives Trading Wasn’t Possible For Cryptocurrencies… Until Now!

Of all the instruments available to investors, few have had a greater impact than derivatives. Defined as securities that take their value from a group of assets, these financial products have opened up a wide range of opportunities for investment. Using them, investors can profit off the knowledge that a stock, bond, or other asset is likely to increase or decrease in value. Derivatives also let them hedge their bets against unexpected changes in the market, so they continue to earn profits under any environment.

Considering how valuable derivatives trading is, it may come as a surprise that this has not yet become a strong feature of the cryptocurrency market. But digital currencies have a number of unique characteristics that make it more difficult to conduct derivatives trading. Bitfair is currently introducing derivatives for cryptocurrencies, thereby making the blockchain industry more secure and profitable for institutional investors, hedgefunds and trading desks. To do so, we’ve had to address the major limitations of derivatives trading in the cryptocurrency market, starting with:

Volatile Prices

If one thing is certain in the blockchain market, it’s that no one can be certain of cryptocurrency prices. Just look at Bitcoin, Ethereum, and other major digital assets. Their prices have been highly volatile over the last few years, as even minor changes in the economic landscape and investor inclinations lead to sizable shifts in the way cryptocurrencies are valued. In general, these coins have tended to increase in price over the long haul, sometimes by exorbitant amounts. But this is anything but a linear trend, and even the most successful cryptocurrencies have suffered serious downturns at times.

The volatility of the cryptocurrency market was a huge barrier to the use of derivatives trading. In order to trade derivatives profitably, investors must be able to assess the future value of the underlying assets with some degree of accuracy. But given that they change in value so wildly and so rapidly, this was almost impossible to do with cryptocurrencies. Investors thus feared that they would buy the wrong derivatives contracts, realize the mistake too late, and lose all their money.

Bitfair has taken a number of steps to limit this risk and give investors more confidence about buying cryptocurrency derivatives. We have extended derivatives trading to a larger number of cryptocurrencies, thereby giving investors the ability to diversify their activities and limit downside risk. We’ve also made it possible to short a large variety cryptocurrencies, further increasing the opportunities for diversification. But perhaps our most important innovation is the introduction of Smart Option Contracts to cryptocurrency trading.

We design contracts that set the terms for cryptocurrency trades and then enforce those terms automatically. Such smart contracts contain a floor or ceiling price to limit investor loses more than a certain amount of money on it. These contracts mean that even if an investor is wildly wrong about a cryptocurrency’s future value, they can only lose so much money. As a result, cryptocurrency derivatives trading is a far less risky activity, allowing enough investors to get involved to make it broadly viable.

Investor Unreliability

At the most fundamental level, derivatives are agreements between investors to exchange an asset when it reaches a certain price or an option to execute a certain trade. They can only work if both parties hold up their end of the bargain, regardless of whether it proves profitable to do so. Thus whenever someone engages in derivatives trading, they are taking a risk that the other party will refuse to fulfill their responsibilities and leave them holding the bag. This is a risk for any type of derivatives trading and what has hindered brokers to offer derivative contracts in cryptocurrency. Given the uniquely volatile nature of blockchain assets and the lack of regulation surrounding them, it was particularly serious for cryptocurrencies, where many investors might try to back out of deals if they don’t prove as profitable as expected.

Bitfair’s smart contracts eliminate most of this risk. When investors trade derivatives on Bitfair, they automatically sign one of these contracts and then have no role in enforcing it. Thus even if an investor wants to back out of a deal, the Bitfair contract will automatically transfer the funds or assets they promised. As a result, the risk of investor reliability will no longer hold back cryptocurrency derivatives.

Regulatory Uncertainty

In addition to amplifying other risks, the lack of regulation on the cryptocurrency market is itself a problem for investors. Investors know that sooner or later, governments will begin regulating cryptocurrencies, but they don’t know what those regulations will look like or how they will affect the currencies’ value. They are thus wary about buying derivatives in the cryptocurrency industry, as profiting off derivatives depends on the ability to make reasonable predictions about future price changes.

Bitfair cannot shield the entire cryptocurrency market from regulatory uncertainty. But what we can do is take extensive precautions to prepare our own traders and assets for likely future regulations. In particular, we are developing a strong user identification system, which is likely to prepare us for regulations relating to fraud and authentication. We have also earmarked large portions of our budget to spend researching and adapting to all new regulations as they come out. These efforts will introduce a greater degree of stability to derivatives traded on our platform, enticing institutional investors and hedge funds to get involved.

For more information on Bitfair’s efforts to introduce derivatives trading to the cryptocurrency market, visit our website today.

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Posted by Crypto Core Media