Crypto Financial Products

As cryptocurrency trading matures, an increasing number of financial products are becoming available for investors interested in getting exposure to digital assets. In most cases, many of these mechanisms are iterations of financial concepts that have been around in traditional finance for many years. Investors are able to diversify portfolios and create sophisticated strategies by expanding outside of conventional spot trading.

Lending

Exchanges have introduced lending activity for owners of digital assets where loans in cryptocurrency are given out to borrowing investors, or back to the exchange itself, and interest is earned. Lending offers holders of unused cryptocurrency from their portfolios an opportunity to add an additional source of income.

Margin Trading

Margin trading involves using borrowed assets to increase leverage on a trade, opening a larger position than the actual amount of the trader’s funds. Essentially, the exchange will lend the trader an amount of funds to increase the size of their crypto order, which in turn increases the gain from a profitable trade.

For example, if you place a cryptocurrency margin trade with a leverage of 2X, the exchange will lend you the same amount you put up to open the position to double your buying power. The matched amount from the exchange is to be repaid once the trade is closed.

Shorting

To earn a profit when prices fall, shorting can be done by investors for cryptocurrencies. Shorting is typically used by investors to speculate a decline or to hedge against the downside risk of the asset. Most exchanges with margin trading will be able to support shorting as well.

Futures

Crypto futures contracts are agreements to buy or sell an asset at a later date for a fixed price. They are typically used by investors as a way to hedge other assets or to lock in profits when trading in more volatile markets. Crypto futures contracts are can be extremely capital efficient, meaning that less money is required to open positions than if you were spot trading (1x) or margin trading (3–5x). Using collateral as low as 2% of the notional amount, crypto futures allow you to take positions with up to 50x leverage — giving you the flexibility to position yourself in the market while maintaining low exchange risk. Cryptocurrency futures allow you to maximize your returns by leveraging to multiply your profits and apply advanced trading strategies to digital assets.

Options

Cryptocurrency options trade the same as any other traditional call or put option where an investor pays a premium for the right — but not obligation — to buy or sell an amount of digital assets on an expiration date set by the options contract.

Options can be used to hedge financial risk from unforeseen events, as well as to make a profit on very volatile financial assets.

Unlike most retail crypto tax solutions, Lumina’s comprehensive crypto-native accounting platform supports these more sophisticated financial products. Learn more at https://www.lumina.app.

Disclaimer: Lumina does not provide legal, tax, investment, or other professional advice. Please consult your own legal, tax, or accounting professionals for advice on compliance with applicable state and federal laws. This post is provided for informational purposes only, and is not intended to substitute for professional tax, accounting, audit, or legal advice. Information provided on Lumina is subject to change without notice.