How To Analyse And Manage Risk When Trading Bitcoin Derivatives

Avoid getting REKT by knowing the risks of your derivative positions

Introduction

Over the course of the last one and a half year, options on bitcoin became an increasingly popular instrument. Only a handful of exchanges is currently offering options on bitcoin (and ethereum) and my expectation is that derivatives on crypto will gain more and more interest. This interest is coming from both retail and professional investors. Retail is more likely to use derivatives as a speculative instrument, while professional investors are more likely to use derivatives to manage risk. In this article I will briefly run through how different exchanges started to offer derivatives on bitcoin and how the offerings differ between them. I will explain how the perpetual contracts and options offered by these exchanges differ from regular options and futures and what it means to both their profit and loss and their risk profiles. Please be aware that derivatives are complex products. Many retail investors get REKT when using them, because they are not aware of the concept of leverage, margin requirements and collateral. That many retail traders are getting liquidated, doesn’t mean that these instruments are a threat. It means they are poorly understood and therefore poorly used as well. If you know how to use them and you understand the risks of these instruments, they proof to be very useful. This article concludes with analysis of the market…