Cryptocurrency Derivatives

Cryptocurrency derivatives are fast becoming some of the most popular financial products. They allow investors to hedge spot trades, utilise leverage and speculate on market shifts. It’s perhaps unsurprising then that trading volumes have soared. In this article, we provide definitions and examples of the top cryptocurrency derivatives on the market. We also list the best exchanges and platforms alongside a guide to getting started for beginners.

Crypto Brokers

#1 - eToro USA

Why We Chose eToro USA

eToro US offers 24 tradeable cryptoassets, with just a 1% buying/selling fee added to the spread. Additionally, there are 80 different coins available through the broker’s proprietary wallet service. You can also practice your crypto strategies easily by switching between live and demo mode. Crypto asset investing is highly volatile and unregulated. No consumer protection. Tax on profits may apply.

"eToro remains a top pick for traders looking for leading social investing and copy trading services. With a low deposit, zero commissions and an intuitive platform, the broker will meet the needs of newer day traders."

- DayTrading Review Team
  • Coins: BTC, ETH, BCH, DASH, LTC, ETC, MIOTA, XLM, EOS, NEO, ZEC, XTZ, MKR, COMP, LINK, UNI, YFI, DOGE, AAVE, ALGO, MANA, ENJ, BAT, MATIC, FLR, SHIBxM
  • Crypto Mining: No
  • Auto Market Maker: No
  • Crypto Spread: BTC 0.75%
  • Crypto Lending: No
  • Platforms: eToro Trading Platform & CopyTrader
  • Crypto Staking: No
  • Minimum Deposit: $10
  • Regulator: SEC, FINRA

About eToro USA

eToro is a social investing platform that offers short-term and long-term trading on stocks, ETFs, options and crypto. The broker is well-known for its user-friendly community-centred platform and competitive fees. With FINRA and SIPC oversight and millions of users across the world, eToro is still one of the most respected brands in the industry. eToro securities trading is offered by eToro USA Securities, Inc.

Pros

  • The online broker offers an intuitive social investment network with straightforward copy trading on cryptos
  • eToro USA Securities is a trustworthy, SEC-regulated broker that is a member of FINRA and SIPC
  • The $10 minimum deposit and straightforward account opening process means beginners can get started quickly

Cons

  • There's a narrower range of day trading instruments available compared to competitors, with only stocks, ETFs and cryptos
  • The proprietary terminal doesn't support trading bots and there are no additional stock market analysis tools
  • There's no MetaTrader 4 platform integration for traders who are accustomed to using third-party charting tools

#2 - NinjaTrader

Why We Chose NinjaTrader

You can get exposure to micro Bitcoin futures through the CME Group’s centralized exchange, which is highly regulated by the US CFTC. Micro contracts allow you to trade a fractional size of one Bitcoin, giving you more risk control and order flexibility.

"NinjaTrader continues to meet the demands of active futures traders looking for low fees and premium analysis tools. The platform hosts top-rate charting features including hundreds of indicators and 10+ chart types."

- DayTrading Review Team
  • Coins: BTC
  • Crypto Mining: No
  • Auto Market Maker: No
  • Crypto Spread: Floating
  • Crypto Lending: No
  • Platforms: NinjaTrader Desktop, Web & Mobile, eSignal
  • Crypto Staking: No
  • Minimum Deposit: $0
  • Regulator: NFA, CFTC

About NinjaTrader

NinjaTrader is a US-headquartered and regulated brokerage that specializes in futures trading. There are three pricing plans to suit different needs and budgets, as well as ultra-low margins on popular contracts. The brand's award-winning charting software and trading platform also offers a high-degree of customization and superb technical analysis features.

Pros

  • Traders can get free platform access and trade simulation capabilities in the unlimited demo
  • You can get thousands of add-ons and applications from developers in 150+ countries
  • NinjaTrader is a widely respected and award-winning futures broker and is heavily authorized by the NFA and CFTC

Cons

  • Non forex and futures trading requires signing up with partner brokers
  • There is a withdrawal fee on some funding methods
  • The premium platform tools come with an extra charge

#3 - Interactive Brokers

Why We Chose Interactive Brokers

IBKR lets you purchase and hold Bitcoin, Bitcoin Cash, Ethereum, and Litecoin at competitive commission rates and without needing a crypto wallet. Additionally, there is a range of other diverse assets to explore, such as crypto indices like the NYSE Bitcoin Index, as well as futures contracts like the BAKKT Bitcoin Futures.

"Interactive Brokers is one of the best brokers for advanced day traders, providing powerful charting platforms, real-time data, and customizable layouts. Its superb pricing and advanced order options also make it highly attractive for day traders, while its diverse range of equities is still among the best in the industry."

- DayTrading Review Team
  • Coins: BTC, LTC, ETH, XRP
  • Crypto Mining: No
  • Auto Market Maker: No
  • Crypto Spread: 0.12%-0.18%
  • Crypto Lending: No
  • Platforms: Trader Workstation (TWS), Desktop, GlobalTrader, Mobile, Client Portal, AlgoTrader, OmniTrader, eSignal, TradingCentral
  • Crypto Staking: No
  • Minimum Deposit: $0
  • Regulator: FCA, SEC, FINRA, CBI, CIRO, SFC, MAS, MNB

About Interactive Brokers

Interactive Brokers (IBKR) is a premier brokerage for experienced traders, providing access to 150 markets in 33 countries, along with a suite of comprehensive investment services. With over 40 years of experience, this Nasdaq-listed firm adheres to stringent regulations by the SEC, FCA, CIRO, and SFC, amongst others, and is one of the most trusted brokers for trading around the globe.

Pros

  • IBKR is one of the most respected and trusted brokerages and is regulated by top-tier authorities, so you can have confidence in the integrity and security of your trading account.
  • IBKR continues to deliver unmatched access to global stocks with tens of thousands of equities available from 100+ market centres in 24 countries.
  • There's a vast library of free or paid third-party research subscriptions catering to all types of traders.; plus, you can enjoy commission reimbursements from IBKR if you subscribe to Toggle AI.

Cons

  • You can only have one active session per account, so you can’t have your desktop program and mobile app running simultaneously, making for a sometimes frustrating trading experience.
  • TWS’s learning curve is steep, and beginners may find it challenging to navigate the platform and understand all the features. Plus500's web platform is much better suited to new traders.
  • Support can be slow and frustrating based on tests, so you might find it challenging to reach customer service representatives promptly or encounter delays in resolving issues.

#4 - OANDA US

Why We Chose OANDA US

You can speculate on the world’s biggest cryptos by market cap. Commissions are lower than many peers starting at 0.25%. Through the broker’s partnership with Paxos, clients can spot trade cryptocurrencies on the itBit exchange through the OANDA native platform.

"OANDA remains an excellent broker for US day traders seeking a user-friendly platform with premium analysis tools and a straightforward joining process. OANDA is also heavily regulated with a very high trust score."

- DayTrading Review Team
  • Coins: BTC, ETH, LTC, BCH, PAXG, LINK, UNI, AAVE
  • Crypto Mining: No
  • Auto Market Maker: No
  • Crypto Spread: $100
  • Crypto Lending: No
  • Platforms: OANDA Trade, MT4, TradingView, AutoChartist
  • Crypto Staking: No
  • Minimum Deposit: $0
  • Regulator: NFA, CFTC

About OANDA US

OANDA is a popular brand offering exceptional execution, low deposit requirements and advanced charting and trading platform features. The top-rated brand has over 25 years of experience and is regulated by trusted agencies, including the NFA/CFTC. Around the clock support is available for short-term traders, alongside flexible contract sizes and automated trade executions.

Pros

  • Seasoned day traders can access industry-leading tools, including an MT4 premium upgrade and advanced charting provided by MotiveWave
  • Beginners can get started easily with $0 minimum initial deposit
  • Day traders can enjoy fast and reliable order execution

Cons

  • It's a shame that customer support is not available on weekends
  • There's only a small range of payment methods available, with no e-wallets supported
  • The range of day trading markets is limited to forex and cryptos only

#5 - Uphold

Why We Chose Uphold

You can buy and sell 250+ crypto assets with fiat currencies or in crypto pairs using the straightforward mobile app or through Uphold's browser-based account homepage. This is significantly more than many rivals. You can also earn up to 16% APY by staking one or more out of 32 valid tokens, or send tokens to an external wallet.

"Uphold remains a top choice for crypto investors looking for a one-stop-shop solution to accessing the markets. There are over 250 tokens to buy, sell and trade through flexible platform options."

- DayTrading Review Team
  • Coins: BTC, BTCO, AAVE, ALCX, DYDX, INH, XYO, API3, GHST, LSK, AUDIO, GLMR, NMR, CAKE, GODS, REQ, CHR, TRB, DAO, ROOK, XRP, ETH, BAT, ADA, ALGO, ATOM, AVAX, AXS, BCH, BAL, BTG, CSPR, COMP, CRV, DASH, DCR, DGB, DOGE, DOT, EGLD and many more
  • Crypto Mining: No
  • Auto Market Maker: No
  • Crypto Spread: Up to 1.5%
  • Crypto Lending: No
  • Platforms: Desktop Platform, Mobile App
  • Crypto Staking: Yes
  • Minimum Deposit: $0

About Uphold

Uphold is a digital asset platform offering a range of services, from crypto trading and staking to payment cards that provides rewards and easy multi-currency payments. The company was established in 2015 and has enabled $4+ billion in transactions. Uphold is now active in 180+ countries and deals in 200+ crypto and fiat currencies.

Pros

  • Crypto staking is available on 30+ tokens with above-average rates up to 16%
  • Over 250 cryptos are available including major tokens like Bitcoin and Ethereum
  • Two-step authentication bolsters user security

Cons

  • Customer service is slow based on tests, with limited contact options
  • There is a 2.49% fee if you want to use debit or credit cards
  • Uphold operates with limited regulatory oversight

Cryptocurrency Derivatives Explained

The term ‘cryptocurrency derivative’ is an umbrella for a collection of different financial contracts that derive their value from the crypto they are based upon. A crucial characteristic of a derivative contract is that investors don’t own the underlying crypto, meaning an investor can speculate on the future value of Bitcoin, for example, without actually buying BTC and holding it in a wallet. The terms of a contract vary depending on the type of derivative.

What are cryptocurrency derivatives

Futures & Options

Futures and options are contracts that allow a party to purchase an asset at a set price in the future. In a futures contract, there is an obligation to purchase at the agreed price, whereas an options contract gives the holder the choice.

Futures and options can be valuable cryptocurrency derivatives securities since the price agreed in the contract might not match the market price at the time. For example, if I enter into a futures contract to buy Bitcoin (BTC) at $40,000 in one month’s time, yet when the contract expires the market price is now $50,000, I can make a profit by reselling the Bitcoin at the new market price.

CFDs

CFDs are contracts for the difference in price between the buy and sell points.

For example, if I open a long position on Bitcoin with the price of $20,000 and the price rises, I will profit from any rise – but if the value falls to below $20,000 I would begin to make a loss on the trade.

They enable cryptocurrency derivatives traders to speculate on movements in price without purchasing the underlying asset.

In the world of cryptos, this is a useful advantage since there is no requirement to hold tokens in e-wallets.

High-profile crypto exchange hacks have meant that protecting your tokens from theft is vital. With CFDs, traders can benefit from the same market movements, but with reduced security issues. CFDs also allow traders to short the crypto market and speculate on decreases in the value of tokens, unlike the spot market.

Perpetual Swaps

Perpetual swap markets cover cryptocurrency derivatives that are similar to futures contracts, but with no expiry date. They are perpetual, in that they can be held indefinitely without an obligation to buy/sell.

The lack of an expiry date means that a contract price could easily diverge from the spot market price. The funding rate prevents this from happening by introducing a fee or rebate for holding a position, depending on whether they’re long or short. For example, if the perpetual swap contract is trading above the price of spot currency, the funding rate would be positive.

This means long position holders would have to pay short position holders, which encourages the opening of short positions and discourages long positions. When more short positions are opened, this will drive the price down to become more in line with the spot price. The same works in the opposite direction if the perpetual swap is below the spot value. Short traders would pay long, and the price of the swap would rise.

Market Analysis

The market for cryptocurrency derivatives is booming. A recent report by the Carnegie Mellon University of Bitmex, one of the largest exchanges in the industry, found that on average, volumes traded in the cryptocurrency derivatives market exceed that of the spot market by a factor of five.

It’s easy to see why they’re so popular. Cryptocurrency derivatives can be used to hedge against price movements in the spot market. So for every spot trade, there’s a multitude of derivatives that can complement and decrease the risk of downside. But, this is true of fiat derivatives too, so what makes crypto so special? The Carnegie Mellon study revealed that crypto traders tend to be active 24 hours a day, regardless of the timezone they’re in. Wall Street tends to trade between 9:30 am and 4:00 pm EST while crypto derivatives are being traded long into the night.

Cryptocurrency derivatives analysis

There are also fewer hoops to jump through when you’re looking to trade crypto. Many exchanges do not require identity checks (Know Your Customer or KYC checks). This means anyone with an email address and cash can trade, opening the market up to a larger customer base.

The 24-hour, unrestricted nature of blockchain has created a billowing derivatives market – and the action is unlikely to stop anytime soon.

Regulation

In the UK, the FCA has banned cryptocurrency derivatives, stating the volatility of the underlying asset as the reason. Despite this, buying and selling the underlying asset, the crypto tokens themselves, is still legal.

Many of the top cryptocurrency exchanges restrict derivatives trading for US citizens, in particular, Bitmex and Binance. Many of the top brokers have cited regulation as the reason for restrictions.

In Europe, there’s a lack of clarity about where cryptocurrencies sit in the current MiFID II regulation. However, it’s understood that trading on derivatives is acceptable and many of the biggest exchanges do accept European traders. The same is true of Canada, Australia, and beyond.

How To Start Trading Cryptocurrency Derivatives

To start trading cryptocurrency derivatives, you’ll first need to select a platform. Some of the top Bitcoin exchanges that offer derivatives include Bitmex and Binance. Kraken also has a separate platform that offers futures and options trading on cryptos.

When looking for the best exchanges, it’s important to consider the following factors:

  1. Leverage – In the case of Bitcoin, some of the exchanges above offer leverage up to 100x your initial deposit. For tokens with a lower market cap, leverage is usually less. Consider how much leverage you’ll require for your trading strategy. Remember that trading on margin increases the risk involved, which can result in losses beyond your deposit amount.
  2. Simulated trading – Many of the top exchanges offer the option to practice with a simulator or demo account. This can be a useful starting point for those new to trading cryptos.
  3. Security – When trading anything crypto related, it’s always important to consider the security of your investments. Look for an exchange that has never been hacked or prioritises the safety of client funds. Always ensure you have 2FA enabled on any account you hold, where possible.
  4. Regulation – Crypto derivative exchanges are not always held to the same standard of regulation as fiat currency brokers and they may not be registered with the same licensing bodies. Despite this, there are some indications that an exchange is legitimate. Look for those registered with the AUSTRAC in Australia, FINTRAC in Canada, or the FSA in Japan, for example.

Final Word On Cryptocurrency Derivatives

Trading crypto derivatives is increasingly popular – and it’s easy to see why. The ability to hedge, utilise leverage and trade 24/7 can be beneficial to a trading strategy. But globally, regulation is tightening due to the volatility of the crypto market itself. The next few years will be crucial for understanding the longevity of these financial assets.

FAQ

What Are Cryptocurrency Derivatives?

Cryptocurrency derivatives are financial contracts that derive their value from the cryptocurrency they are based on, such as Bitcoin. They allow traders to profit from price movements without owning the underlying asset. Examples of cryptocurrency derivatives include CFDs, futures and options.

Why Have The FCA Banned Cryptocurrency Derivatives?

The FCA has banned cryptocurrency derivatives for UK retail traders, due to the volatility of the market and the fact that a reliable valuation of a token’s price cannot easily be determined. Despite this, crypto trading on the spot market is still permitted.

Where Can I Trade Cryptocurrency Derivatives?

There are many brokers and exchanges globally that offer cryptocurrency derivatives trading. Some of the top brokers include Bitmex, Binance, FTX and Bybit.

Why Would I Want To Trade Cryptocurrency Derivatives?

There are lots of reasons why crypto derivatives can be beneficial to your trading strategy. In particular, derivatives allow you to go long or short on a trade. In the spot market, you can only profit if the price goes up. However, when you open a short position using a derivative, you’ll profit from a decrease in price, allowing you to hedge your bets and manage risk.

Do I Need An E-Wallet For Cryptocurrency Derivatives Trading?

No – you don’t need to store your crypto derivatives in an e-wallet, unlike spot cryptocurrency. This is because a derivative is a contract with the exchange and there is no underlying asset to store.