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Want Less Risk When Trading Crypto? Use Derivatives

Do you enjoy buying, selling, holding, and otherwise dealing in cryptocurrency but dislike the amount of risk? If so, you’re like many others who are attracted to the cryptocurrency market for its potential profits but want to find ways to minimize overall risk. Luckily, there is a relatively simple, straightforward way of achieving that goal, and it’s called derivative trading. Most are quite familiar with derivatives like options and futures in the traditional stock market, but not as many realize that they can just as easily take advantage of offsetting risk in the crypto markets in the exact same way.

Every day, altcoin enthusiasts buy and sell futures contracts, options, and other arrangements to protect their underlying holdings in assets like bitcoin and Ethereum. The entire cryptocurrency marketplace is known for its day-to-day volatility. That’s just one reason so many investors and traders are turning to things like options contracts in order to lessen their overall risk, diversify altcoin portfolios, and open up the possibility of earning profits even when the price of a cryptocurrency goes down. Here are some of the essential points to keep in mind if you want to minimize the riskiness of your altcoin portfolio.

Why Use Crypto Derivative Assets?

Plenty of savvy investors choose to do crypto index trading in order to mitigate the volatility risk that the sector is known for. But just spreading one’s capital among a dozen or even a hundred different coins is not always enough protection in a roller coaster price environment. Luckily, there are other ways to minimize risk besides just playing the indices, and they encompass the many reasons people use cryptocurrency instruments like futures and options contracts. Not only do these versatile types of investing offer the chance to hedge and speculate in any direction, but they also offer higher liquidity than owning altcoins directly, make it easy to diversify a portfolio when used with other asset classes, optimize the ability of the market to find authentic pricing levels, and mitigate risk by their very design.

Speculation Allows for Profits in Up or Down Markets

One of the primary factors that attract people to the altcoin derivative niche is the chance to earn in bi-directional markets. In a similar way that investors can easily go long or short with CFDs (contracts for difference) and with forex contracts, they can use futures or options on altcoins to speculate on price movements in upward or downward directions. This single feature is a game changer for anyone who has previously been a buy and hold investor in the cryptocurrency space. In bear markets, which has been the case in recent bitcoin and other leading coins, holders are stuck with decreasing values. With a simple futures contract, it’s possible to bet that prices will go down and turn a profit if they do.

Lots of Pros and a Few Cons

Trading enthusiasts in the cryptocurrency space like the fact that derivative-based strategies come with very low transaction costs in general are an easy way to mitigate risk within a portfolio, help to make markets more efficient, and can be used with any amount of leverage, and offer extremely high liquidity. On the downside, it’s worth noting the altcoin space is one in which it is impossible to bring riskiness down to levels associated with traditional equities or forex exchanges. Cryptocurrencies like bitcoin and others undergo vast price swings even in the best of times. Additionally, there are several developed nations in which it is illegal to use options or futures within the altcoin sector. Finally, there can be a relatively long learning curve for anyone trying to learn how to correctly place orders that involve options or futures.

Tips for Smart Derivative Trading

There is no one right way to use a crypto tracker tool or these other sophisticated instruments to play the altcoin market. However, there are a few common guidelines that can work for people who are new to the arena. A futures contract is generally a better fit when prices of altcoin assets are falling. Conversely, when the general trend is bullish, most traders choose to use options to magnify their potential gains. One of the oldest rules that applies to any kind of speculating or hedging is never risk more than you can afford to lose. No matter how carefully you plan and analyze the markets, they can and will turn against you at what seems like the most inopportune time. When selling short, hedging, or entering into an options contract, calculate your maximum loss amount and readjust the trade’s parameters if the amount would be too large of a loss for your account.