Difference Between Option and Future Trading in Cryptocurrency


For people who trade cryptocurrencies, futures and options are exciting tools. They let you take careful guesses about the market, which makes cryptocurrency trading happen faster. Trading might seem like something only experts do, but now it's becoming popular for everyone, thanks to crypto futures and options. 

As more people became aware of the crypto sector, many of its businesses felt compelled to conduct further research to identify patterns, update themselves, and keep everyone aware of the trend. The most important and prominent enterprises in the cryptocurrency market are "crypto exchanges." 90% of crypto trends will be discovered just through cryptocurrency exchange updates. As a result, crypto exchanges have played an important role in the development of the cryptocurrency business. 

Futures and options trading dominate the cryptocurrency market headlines, however, many new traders have no idea about the distinction between these two primary crypto trading features.

In reality, the total trading volume for Bitcoin and Ethereum options last year was $387 billion.

However, how do crypto options and futures contracts work? And what is the main difference between them?

This guide delves into these questions and more!  Keep reading to find out more about what sets them apart and how they work.

Overview of Options and Futures Trading

Future trading and options trading are important in the stock market, and now cryptocurrency exchanges are starting to use them too.
These tools help protect traders from the unpredictable nature of the crypto market.

But how did they come about?

First, there was forward trading, where people made agreements to trade assets in the future. However, it had risks like default, no regulations, rigidity, and lack of liquidity.

Then came futures trading, which improved upon forward trading by solving these problems.
Options trading came later.

Both futures and options trading are based on predicting the future price of an asset. One person might think the price will go up and become a buyer, while another might think it will go down and become a seller. This prediction activity is what drives the market.

What is Options Trading in Crypto Exchange? 

Options trading, or options contracts, is a type of agreement that allows traders to buy or sell assets at a preset price on a specific date in the future.

 In other words, you have the right, not the obligation, to act.

To make this trading more profound, a few options have been included.

1. Call option for buyers
2. Put Option for Sellers

The premium is the price paid for getting a call option or a put option.

Future classifications of these are

American options - This permits traders to execute the contract on or before the expiration date.
European options - It only permits the trader to execute a contract at the expiration date.
How Does options Trading Work in the Cryptocurrency Sector. 

Let's examine an example to help you better understand it.

Consider Alice, a trader on the cryptocurrency exchange, according to Binance. She believes that the price of Bitcoin will rise in the future therefore, she chose to purchase a Call option.

She purchased the call option for $50 as a premium.

As predicted, the price of BTC increased from $7,000 to $7,500; she acted at the proper time and executed the contract.

First, we need to determine whether it is a profit or loss. and how much profit / loss is in the aforementioned scenario?

There is a formula for calculating Don't worry; believe me, it's easy.

Realized (profit and loss) = [current price - actual price during contract] x number of assets

In the preceding example, the current price is $7500, the contract price is $7000, and the quantity of BTC (assets) is one.

Total profit and loss = [7500 - 7000] x 1 Realized profit and loss = $500

Net profit is calculated by subtracting profit from premium: 500 - 50 = $450.

Alice has profited $450 in this instance.

The same applies for put options for selling purposes. Alice can keep the contract, and it will settle automatically at the expiry date.

If the price of Bitcoin falls, her maximum loss is the Premium price, which is $50 USD, but her profit is substantial. Profit is proven when the net profit price is greater than the premium price.

There are two types of options: limited downsite and unlimited upsite.

Crypto Exchanges that provide Options trading

The premium price and procedures differ for exchanges, some of which enable options trading. 

1. Binance
2. BitMex
3. LedgerX
4. DeriBit
5. Quedex

Options Trading: Features and Characteristics

Here are some primary features and characteristics of crypto-options trading:

Call and Put Options: Similar to traditional trading, crypto options allow you to buy call options (bets on price increases) and put options (bets on price decreases) for a variety of cryptocurrencies.

Underlying Assets: Cryptocurrency options are derivatives based on the value of underlying cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), and others. The most prominent cryptocurrencies are used as the underlying assets.

Expiration Dates: Crypto options include expiration dates, which means they are time-limited contracts. You can select from a variety of expiration dates, ranging from very short (e.g., hourly or daily) to long (e.g., monthly or yearly).

Strike Price: The strike price is the price at which the option holder can purchase (for a call option) or sell (for a put option) the underlying cryptocurrency. It's a crucial element affecting the option's valuation.

Premium: The cost of purchasing an options contract is known as the premium. It's the option's price.

Benefits of Options Trading in Crypto 

Hedging: Crypto options can be used to control risk and hedge positions. You can safeguard your current bitcoin holdings from price fluctuations by acquiring put options, which allow you to sell at a predetermined price.

Speculation: Options allow you to benefit from growing (with call options) and falling (with put options) bitcoin prices. Market fluctuations might be profitable even if you do not own the underlying asset.

Limited risk: When purchasing options, the maximum loss is the premium paid for the option contract. This provides downside protection when compared to simply trading the underlying asset.

Versatility: Crypto options are available in a variety of maturities, allowing you to choose between short-term and long-term contracts to suit your investment horizon and trading style.

Profit in Different Market Conditions: Options can be successful in bullish, bearish, or sideways markets. Depending on the technique used, options can produce rewards regardless of market direction.

What is Futures Trading on the crypto exchange? 

Futures trading is similar to options trading in that traders must choose a fixed date and predetermined price for an asset.

In this case, both the buyer and seller are bound to complete the transaction.

Future trading can be utilized for both short- and long-term purposes. If the trader expects a price decrease, they buy short-term trading; if the trader believes in a price increase, they buy long-term future trading.

How Does Futures Trading Work in the Cryptocurrency Sector?

As an example,

Alice wants to buy BTC and believes that it will rise in the future, so she chooses to purchase a futures contract.

The price of one BTC is $10,000, and she plans to acquire 10 BTC. Consider that the cost of a single contract is $100, and she wants 10 BTC.

Contract cost = number of contracts x the cost of one contract.

In this instance, she wants to purchase 10 BTC, hence, the number of contracts is 10.

Make substitutions,

Contract cost = 10 * 100 = 1000 USD
Order value = cost of the contract/entry price.
The current value of an asset is referred to as its entry price. 10,000 USD = 1000/10000
Value of the order: 0.1 BTC

As a result, 0.1 BTC is the starting margin amount for a contract.

If she does not execute the contract on the specified date, it is automatically set to execute by calculating the average price in the last hour. Alice must pay an additional cost for automated contract execution.

Cryptocurrency Exchanges that provide Future Trading


Futures Trading Features and Characteristics In Crypto

Crypto futures trading is a popular and complex method of trading cryptocurrency on financial markets. Here are a few of the main advantages:

Leverage: Using leverage is one of the main advantages of trading cryptocurrency futures.  You can exert more control over a greater stake with less capital. This can result in huge profits, but it also increases risk by amplifying losses.

Standardization: Futures contracts are easier to trade and more liquid since they include established terms and conditions, such as the underlying asset, quantity, quality, delivery date, and trading unit.

Centralization: Futures contracts are traded on centralized exchanges, resulting in a transparent and controlled market. It helps to maintain trading that is fair and orderly.

Two-way market: Futures contracts can be bought and sold, allowing you to have both long and short positions. This allows you to profit from both increasing and decreasing prices.

Daily settlement: Futures contracts are marked to market daily, resulting in daily profits and losses. It reduces risk and keeps you aware of your current situation.

Benefits of Futures Trading in Crypto

Futures trading in the bitcoin market provides various advantages for traders and investors. Here are some of the major benefits.

Market Liquidity: Major cryptocurrencies such as Bitcoin and Ethereum frequently have extremely liquid futures markets. This means that you can enter and exit positions with minimum price slippage.

Arbitrage Opportunities: Futures markets can provide you with arbitrage opportunities to profit from price variations between futures and spot markets. It can help to keep market pricing stable.

Diversification: Trading cryptocurrency futures helps you to diversify your portfolios by including another asset class in your trading approach.

Gain exposure to cryptocurrency without owning it: Crypto futures allow you to speculate on the price of a cryptocurrency without really holding it. This can help you speculate on the future price of a cryptocurrency without having to store or manage it.

Hedge against risk: Crypto futures can be used to reduce risk. For example, if you hold Bitcoin, you can utilize futures to hedge against a drop in its price.

Cryptocurrency Options Trading Vs. Futures Trading

The most notable risk difference is that Future Trading is an obligation, whereas Options Trading is a right.

Options trading has less risk than futures trading.

Options trading is specifically built for buying and selling with call-and-put options.

Automatic settlement occurs together with the additional charge in the futures contract on the expiration date, where the options contract is not an obligation.

While it can be done easily in options trading, calculating profit and loss in futures trading is a little more difficult.

Why are Options and Futures trading so important for Crypto Exchanges?

Both trading generates profits for the trader, and the crypto business had significant volatility during the COVID-19 pandemic. As a result, traders had limited profit opportunities. Many exchanges combine options and futures trading to help traders identify and address such concerns. The primary advantage of both trading features is that "Both Benefits Traders". As a result, existing and prospective cryptocurrency exchanges must integrate such functionalities. 

What makes MetaDiac a special Crypto Exchange Development Company?

MetaDiac is the premier Cryptocurrency Exchange Development Company that offers whitelabel crypto exchange software with the most recent and updated features. As the industry's early adopters, we are never hesitant to explore new things. We have a powerful team of potential developers and business advisers, and we are continually looking for new trends in the industry. Following trends and demand, we included options and futures trading as defaults in your crypto exchange platform.

Feel free to check out our live demo anytime!

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