If you are a newcomer to the crypto space, there’s a good chance you haven’t heard of crypto derivatives like crypto options and crypto futures yet, or haven’t yet grasped what they are needed for. Crypto derivatives are financial instruments that have one cryptocurrency underlying them in a certain amount, which is the basis for the valuation of a crypto derivatives contract.
To trade in crypto derivatives, you don’t need to own the underlying cryptocurrency itself. Crypto futures and options are two types of crypto derivatives that are the most popular among users across the world. In this article, we find out all the details about them, and compare them to find out which one is more profitable for you in the crypto options vs. futures debate!
Understanding Crypto Options and Futures Contracts
Traders can speculate on cryptocurrency price movements by using crypto options and futures contracts. The way they work is as follows:
Crypto Options
Crypto options give the buyer an option to buy or sell a specific crypto at a predetermined price (known as a strike price) on or before a specific date (known as an expiration date). There are two primary types of crypto options:
- Call options: These crypto options give the user the option to buy a crypto options contract at a certain price, and a certain date in the future.
- Put options: These crypto options give the user the option to sell a crypto options contract at a certain price, and a certain date in the future.
In exchange for the right to buy or sell the cryptocurrency, the buyer pays a premium to the seller of the option. The seller of the option, on the other hand, is obligated to sell the cryptocurrency at the strike price if the buyer decides to exercise their option. Options can be used as a hedging tool or to speculate on the future price movements of a cryptocurrency.
Crypto Futures
Crypto futures are contracts that require the buyer to purchase a specific amount of cryptocurrency at a predetermined price and time in the future. Futures contracts in crypto allow traders to speculate on the future price movements of a cryptocurrency by taking a long or short position.
In a long position, the trader agrees to buy the cryptocurrency at a specific price and time in the future, with the hope that the price will increase, allowing them to sell at a profit. In a short position, the trader agrees to sell the cryptocurrency at a specific price and time in the future, with the hope that the price will decrease, allowing them to buy back the cryptocurrency at a lower price and make a profit.
Like options, futures contracts can also be used as a hedging tool or to speculate on the future price movements of a cryptocurrency.
It’s important to note that both crypto options and futures contracts are complex crypto derivatives that carry a high degree of risk. Traders should have a solid comprehension of the underlying market and the mechanics of these contracts before trading them.
Pros and Cons of Crypto Options Trading
Crypto options trading, like any other financial instrument, has its own array of perks and disadvantages.
Here are the many pros and cons of crypto options trading:
Pros
- Limited Risk: One of the key advantages of crypto options trading is that it limits the risk of the trader to the premium paid. This means that traders can make speculative trades with a limited downside risk.
- Flexible Trading Strategies: Crypto options allow traders to choose the strike price and expiration date for the trade, making for greater flexibility.
- Leverage: Crypto options trading allows traders to control a larger position with a comparatively smaller amount of funds through borrowed capital. This means that traders can potentially earn larger profits with a smaller investment.
- Market Efficiency: Crypto options markets are often more efficient than the spot market, as traders can use options to hedge their risk or take a position on the underlying asset.
Cons:
- Complex Instruments: Options trading is a complex financial instrument that requires a solid understanding of the underlying asset, the options market, and the mechanics of the contracts. In this situation, novice traders may have difficulties getting started.
- Limited Timeframe: Options contracts have an expiration date, which means that traders have a limited amount of time to make a profit. This can put pressure on traders to make quick decisions, which can lead to mistakes.
- Liquidity: Crypto options markets may not always be liquid depending on the market conditions, which can make it difficult for traders to execute their trades at the desired price.
- Volatility: Crypto options trading can be highly volatile, with prices fluctuating rapidly in response to market conditions. Traders who are not careful can suffer significant losses.
Pros and Cons of Crypto Futures Trading
Crypto futures trading, as a crypto derivatives instrument, has its own array of perks and disadvantages too. Find the pros and cons of crypto futures trading below:
Pros
- Leverage: Traders who trade futures can control a larger position using smaller capital. This means that traders can potentially earn larger profits with a smaller investment.
- Hedging: Crypto futures contracts can be used as a hedging tool to manage risk, by locking in a price upfront, and sticking to it even amidst a volatile market condition.
- Market Efficiency: Futures markets are often more efficient than the spot market, as traders can use futures contracts to hedge their risk or take a position on the underlying asset.
- Liquidity: Crypto markets are typically more liquid than spot markets, which means that traders can easily enter and exit their positions at the desired price.
Cons
- High Risk: Futures trading is a high-risk financial instrument that carries the potential for significant losses. This is because futures contracts are usually leveraged products, and a small price movement can result in a large loss.
- Limited Timeframe: Futures contracts have an expiration date, which means that traders have a limited amount of time to make a profit. This can put pressure on traders to make quick decisions, which can lead to mistakes.
- Complex Instruments: Futures trading requires a solid understanding of the underlying asset, the futures market, and the mechanics of the contracts. In this situation, novice traders may have difficulties getting started.
- Volatility: Futures trading can be highly volatile, with prices fluctuating rapidly in response to market conditions. Traders who are not careful can suffer significant losses.
Crypto Options vs. Futures: Which One Should You Pick?
When deciding between crypto futures and options trading in the crypto markets, there are multiple factors to consider. Let’s look at the various factors we can compare crypto options vs. futures on the basis of:
| Factors | Crypto options | Crypto futures | Verdict |
| Trading Experience | Options trading is generally considered more complex than futures trading. | Crypto futures are simpler in comparison. | If you are new to crypto trading, crypto futures may be a better starting point as the contracts are more straightforward. |
| Risk Tolerance | Crypto options trading limits risk to the premium paid. | Crypto futures trading typically involves more risk as it is a leveraged product. | If you have a lower risk tolerance, options trading may be a better fit. |
| Time Horizon | Crypto options contracts have a comparatively nearer expiration date | Crypto futures contracts typically have a longer time horizon. | If you are looking for shorter-term trades, options may be a better fit. |
| Volatility | Crypto options prices tend to increase when volatility is high. | Crypto futures contracts can see large price swings during periods of high volatility too. | If you are comfortable with high volatility, either instrument may be a good fit. |
| Market Conditions | Crypto options markets can be affected due to any sudden geopolitical turn of events across the globe. | Crypto futures markets can be similarly impacted. | Crypto options and futures markets can be affected by factors such as interest rates, inflation, geopolitical events, and market sentiment. Before choosing between options and futures, consider the market conditions and how they may affect crypto derivatives. |
| Liquidity | Crypto options markets can be relatively less liquid. | Crypto futures markets can be more liquid due to better popularity. | Crypto futures can be the better option in terms of liquidity. |
Differences in Risk Management for Crypto Futures and Options
Risk management is a pretty crucial aspect of trading any financial instrument. Here are some differences in risk management between the two instruments:
- Limited Risk vs. Unlimited Risk: One of the primary differences between crypto futures and options is the level of risk involved. Options trading limits risk to the premium paid for the option, while futures trading carries unlimited risk as the price can move against the trader by an unlimited amount.
- Stop Losses: Both crypto futures and options traders can use stop losses to manage risk. Options traders can set a stop loss at the premium paid, while futures traders can set a stop loss at a specific price level. However, in crypto futures trading, stop loss orders can be subject to slippage during high volatility, which can result in a larger loss than anticipated.
- Margin Requirements: Both crypto futures and options trading require margin to open a position, but the margin requirements can differ significantly between the two instruments. Futures trading typically requires a higher margin, as it is a leveraged product with higher risk.
- Hedging: Crypto futures and options can both be used as hedging tools to manage risk. Options traders can buy put options to hedge against downside risk, while futures traders can sell futures contracts to lock in a price and protect against future price movements.
- Time Horizon: Crypto futures and options have different time horizons, which can affect risk management. Crypto options contracts have a fixed expiration date, which can help traders manage risk by limiting exposure to a specific time. Crypto futures contracts, on the other hand, have a longer time horizon, which can require more sophisticated risk management strategies.
Conclusion: Which Crypto Derivatives Trading Strategy is Right for You?
Choosing the right crypto derivatives trading strategy depends on personal goals, risk tolerance, trading experience, market conditions, and liquidity. Crypto options trading may be better for new traders with a lower risk tolerance, while crypto futures trading may be more suitable for experienced traders.
It’s important to start with small positions, have a robust understanding of the underlying asset, and manage risk carefully. Ultimately, the best crypto trading strategy is one that fits your preferences and risk management style.
Crypto perpetuals are crypto futures with an added advantage: they have no set date of expiry. This kind of crypto futures can be very beneficial to beginner traders, if you want to try out crypto derivatives trading. What’s more, Millionero can be the ideal exchange for you if you want to start crypto trading in derivatives! Our Perpetual Max feature allows you to take up to 100x leverage when opening a position in the crypto perpetuals market!
No need to worry about the risks either! We automatically set your leverage at a moderate 3x to limit risks for you! Further, with any position with over 80x leverage, you can opt for the ‘hedge’ option, so we automatically open a reverse position for you. This way, your investment stays protected in case of a volatile market condition.
Sign up on Millionero today, and start your crypto trading journey!