Derivatives underpin many trading strategies and, although they have been around for a very long time, their use continues to expand as financial markets evolve. Some derivatives are elementary, others are complex, but in either case, the risks and rewards involved need to be clearly understood if they are to be used effectively. So first, let's get an understanding of what derivatives are, what the FTX cryptocurrency derivatives trading platform is and how the process of FTX crypto futures trading works. 

FTX cryptocurrency derivatives trading platform
FTX cryptocurrency derivatives trading platform

Who uses derivatives

Crypto derivatives are secondary contracts or financial instruments whose value is determined by the underlying asset. For example, BTC, ETH or another asset. 

FTX cryptocurrency derivatives can be used by anyone who, when faced with an undesirable risk, wants to transfer that risk to another party who agrees to take it. Initially, commodity producers used forwards and futures contracts to hedge, i.e. reduce price risk.

To help you better understand FTX derivatives trading, let's look at a couple of examples. 

Imagine you are a rice or corn farmer, and you want to protect the future value of your crop against price fluctuations. You can do this by hedging your position. In other words, you sell your crop today at a price that is guaranteed to be paid when the crop is delivered in the future. However, if this current cash price of grain at the time of delivery turns out to be higher than the guaranteed price, you cannot make a profit because you are bound by the contract and only have the right to receive the agreed delivery price. Therefore, losses or gains on the cash market are offset by gains or losses on the futures contract.

If you had exercised the option, you would have received a contract that gives you the right, but not the obligation, to sell your crops in the future. If future cash prices are more favorable than the option price, you can sell your produce at these prices. 

In addition, using the option limits your potential losses. Commodity-consuming industrialists also use derivatives to hedge their positions, which allows them to forecast production costs and keep them stable.

When commodity producers hedge their positions, who is their counterparty? Of course, it is often other hedgers, such as industrialists, but speculators can also be among them. The speculator takes the opposite position to the hedger and assumes the risk in the expectation of making a profit if prices change favorably.

FTX trading room
FTX trading room

Types of crypto derivatives:

  • Options;
  • Futures;
  • Forwards;
  • Swaps;
  • CFD.

Let us compare the FTX derivatives trading platform and the exchanges on which trading occurred in the early 19th century. 

Put and call options.

At the time, trading put and call options on stocks were becoming standard practice on the London Stock Exchange, but it was not without problems. In 1821, passions associated with trading options became very heated. The Exchange committee received a demand from some of its members to "completely abolish put and call options, which are so widespread that they make the biggest part of stock transactions and are harmful to those, who do not agree with such practice".

But other members were more optimistic about options trading, and the situation was resolved in their favour.

The history of modern futures trading can be traced back to the middle of the nineteenth century by the development of grain trading in Chicago. In 1848, the Chicago Board of Trade (CBOT) was established as a place where buyers and sellers could trade commodities. Initially, only cash commodities were traded, but later, items were traded "to be received",, i.e. contracts that stipulated delivery of goods at an agreed price at a future date. The first CBOT forward contract, for which there is a record, was dated 13 March 1851 and called for delivery of 3,000 bushels of corn in June. The problem was that the first forward contracts were not uniform and were not always enforced. In 1865 the CBOT formalized grain trading by introducing futures contracts, which were standardized.

  • the quality of grain;
  • quantity of grain;
  • time and place of delivery of the grain.

The price of a futures contract was openly set during trading in the exchange hall. These first-grain futures contracts formed the basis of today's commodity and financial futures.

The American Civil War provided an opportunity for the 'highbrow scientists' to create derivatives to suit the needs of the moment. The Confederate States of America issued dual-currency bonds that allowed Southern states to borrow in pounds sterling and pay off the debt in French francs. At the same time, the bondholder had the right to convert the repayment into cotton!

In American exchanges, trading options on commodities and stocks came into practice by the 60-s of the XIX century. At the beginning of the XX century, the Association of Brokers and Dealers on Options was founded (Put and Call Brokers and Dealers Association). 

FTX cryptocurrency derivatives list
FTX cryptocurrency derivatives list

Unique features of FTX

For those wishing to trade FTX derivatives in India, the FTX cryptocurrency derivatives trading platform has unique features. 

FTX uses a unique automated margin and risk mechanism that is blockchain-based, real-time and cross-margined. This margin mechanism is created entirely in-house and is part of the foundation of a completely reimagined exchange.

Cross margin.

Another great feature of FTX's risk management system is the cross margin. Unlike other exchanges, where each of your positions are entirely isolated and requires separate maintenance, on FTX, you can keep all your positions and balances in one wallet.

This means you can keep USDC, BTC, ETH, TSLA and EUR in your wallet, and using any of these. You can trade any futures or other margin products on FTX.

This is useful for three reasons:

  • it eliminates the need to transfer funds between different internal accounts for different products;
  • it gives users total flexibility as to which assets to use as collateral;
  • it prevents liquidation in cases where the client had other types of assets in the wrong wallet.

And, as stated above, this is greatly simplified and enhanced because almost all assets on FTX are based on blockchain, allowing for quick and easy settlement.

FTX ecosystem
FTX ecosystem

Reduced intermediary commissions.

In a traditional financial market, a standard transaction initiated by a retail user may require separate fees from a broker, PFOF firm, dark pool, clearinghouse, prime broker, exchange credit department and exchange - all for a single transaction. These fees are rising, as are spreads and delays.

FTX eliminates the intermediaries. FTX derivatives trading platform has its mobile app, GUI, API, borrowing/credit book and wallet, all freely available to all users.

Real-time mode.

One of the significant problems traditional margin systems face is latency in the settlement.

Take the CME, for example. It can take a day to fund your account there - bank transfers go through prime brokers. Also, the exchange only operates on weekdays - which is still better than the stock exchanges, which are only used during daylight hours.

This means that there are sometimes 72-hour periods when users cannot fund their accounts. For example, if you place a margin call on a Friday, it will be several days before it is executed. Therefore exchanges often give clients several days to make a margin call.

And even if the client does not meet the margin call, his position can only be closed when the exchange is open; sometimes, it takes a few days.

So, if you are a traditional margin exchange, it may be half a week before you can place a margin call and then close a client's position if necessary.

FTX crypto futures trading
FTX crypto futures trading

If you plan to FTX crypto futures in India or FTX cryptocurrency derivatives trading, FTX is a game-changer as it is a real-time exchange. 

It starts with assets. FTX holds the assets of its users, which is necessary to be able to monitor and measure them in real-time. And importantly, these assets are blockchain-based. This means that FTX can process deposits and withdrawals of assets 24/7 at blockchain speed: much faster than a bank transfer. Thus, users can deposit cryptocurrencies, Stablecoins and even exchange tokens around the clock and very quickly, which means they can meet margin requirements in minutes rather than days.

In addition, FTX operates 24/7. As well as giving users a more comprehensive range of services overall, this means that if there is a need to liquidate, it can be done at any time; we do not have to wait for the next weekday.

Finally, FTX futures’s risk management mechanism is fully automated.

Registration on  FTX derivatives trading platform
Registration on FTX derivatives trading platform

To summarise

  • Derivatives are invariably associated with risk; it is the risk that gave them. Therefore, the risks associated with derivatives need to be identified and managed.
  • Many corporations and organisations have been very successful in using and benefiting from derivatives.
  • Unfortunately, there is a lack of understanding of derivatives in the markets, and, given the nature of speculation, the losses can be enormous. When organisations are faced with collapse and loss, they need to take a hard look at their risk management procedures, including the role of derivatives.

It may seem that FTX futures trading is just a form of gambling with no profit motive. However, the quote below shows that this is not the case.

"Betting on a horse is gambling; betting that you will get three spades is entertainment; betting that cotton will go up three points is business. Feel the difference?"

Learn how to trade intelligently and make money!

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