Maximizing Returns: The Power of Crypto Derivatives

For anyone who had bought Bitcoin at its height of close to $20k at the end of 2017 and then held it all the way down to $3k a year later, it must have been a stomach-churning experience.

But not for Mark Dow, a former economist at the International Monetary Fund. He famously opened a short position for a futures contract on Bitcoin near to its peak and closed it on the 18th of December, 2018, right before it hit the bottom.

His story speaks to his genius as much as it does to the power of derivatives as a type of financial instrument that enables investors to make considerable profits, both in a bull and bear market.

In conventional finance, this is nothing new, of course, but the good news is that the crypto world is catching up. Everywhere we look, we see crypto derivatives gaining in prominence and considering the unique benefits they offer, we view this as a positive development.

Not only does it open up new avenues to hedge against risk, but it can also benefit the market in terms of price discovery, liquidity, and accessibility.

Derivatives arising!

2019 is turning out to be an eventful year for the crypto industry, to say the least. Aside from Bitcoin’s price recovery, the proposal of Libra, and notable developments at the regulatory level, this year has centered around the rise of crypto derivatives.

Some of the major highlights include Bakkt’s official launch of its physically delivered Bitcoin futures trading platform, ErisX receiving regulatory approval for the same product, the Chicago Mercantile Exchange Group’s announcement of its intention to add options to its Bitcoin futures contracts, and Binance’s move into the crypto futures space. And this is just the tip of the iceberg.

In the short term — as we’re already seeing according to some analysts — the rise of derivatives can lead to increased volatility due to poor risk management, especially as inexperienced traders experiment with leverage.

But notwithstanding such initial hiccups, and despite the reputation of derivatives having become somewhat tainted during the 2008 Global Financial Crisis, throughout history derivatives have played an important role in generating wealth and they continue to be traded in huge volumes. And considering the unique benefits they offer, in the long term, the growth of the crypto derivatives market is a positive development for our industry.

The benefits of crypto derivatives

Up until now, spot trading has been the most popular way to engage the crypto market. It’s straightforward (i.e. buy low, sell high if you can get it right), but it’s also very limited. Derivatives products, which include contracts for difference, options, futures, and swaps — or perpetual futures contracts — offer a specific set of benefits to investors and the market at large, including:

  • Familiarity
    Considering crypto is still a relatively new concept for mainstream investors, crypto derivatives offer a more familiar way to engage this asset class, and thus foster accessibility.
  • Trade in any market condition
    Derivatives enable investors to profit from price movements in both directions, depending on whether they go long or short.
  • Hedging
    Derivatives are part of an active risk management strategy: they function as a type of insurance for your crypto portfolio. As a long term investor, when the price of your asset goes down, there is no need to sell at a loss, or ‘hodl’. Instead, you have the option to go short until the spot market recovers.
  • Leverage
    A notable benefit of derivatives is that you can trade with leverage. This way, you can maximize exposure and even with a small margin take on a sizable position. While this does increase risk — you could be liquidated and lose your entire margin — it can also amplify your profits significantly.
  • Optimized price discovery
    By enabling investors to go long and short, price discovery mechanisms can become more efficient which can lead to smoother market adjustments and hence less jitter.
  • Increased liquidity
    By enabling market makers to hedge against, and thus maintain their positions in the spot market, we can expect the rise of derivatives to grow and stabilize the market in terms of liquidity.

Trading Derivatives with AAX

As a next-generation crypto exchange, and among the first to offer futures, we are working to facilitate the entry of more investors into the crypto market.

On AAX, perpetual futures contracts with up to 100x leverage are available for Bitcoin, 50x for Ether, and 20x for Litecoin, EOS, and XRP. As these contracts have no expiry date, traders have maximum flexibility: you are able to adjust your leverage to mitigate risk and can close your position at any time. Upon closure, contracts are settled in Bitcoin.

Additionally, unlike with forex markets, we’ve organized the liquidation mechanism in such a way that you cannot lose more than your margin.

Derivatives are a new and exciting way for crypto enthusiasts and the crypto curious to engage digital assets, and if you’re not familiar with this type of product, we encourage you to learn more about it from our Futures Guide for Beginners.

Originally published at on October 3, 2019.



Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store



The world’s first crypto exchange powered by LSEG Technology.