Crypto and DeFI Derivatives – Why are they so Important?
DeFi, General - August 25, 2020
Derivatives are one of the most useful hedging tools in the crypto and DeFi market. You might’ve heard of Bitcoin futures and Bitcoin options. In this video, we break down crypto and DeFi derivatives and its importance to the blockchain world.
At present derivatives may be seen as a tool to trade, but they are actually a strong hedging tool. Derivatives are used to hedge against future price uncertainty. This is done by taking a position in the present based on future expectations.
Using derivatives to hedge future uncertainity is common in markets where risk is everywhere. For instance hight capital market like airlines dependent on the price of oil. Or, in an agriculutral market with futures and options on crops.
Where futures and options differ is by the degree of hedging allowed. When taking a futures contract, the holder is obligated to execute the transaction. But with an options contract, the holder has the option to not execute the transaction. This option comes at a price, called a premium. There are two types of options – a call option and a put option. A call option gives the holder an option to buy the asset. Similarly, a put option gives the holder an option to sell the asset.
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