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What are Forex Derivatives?

Forex is the largest financial market in the world with a daily volume of $5.1 trillion. Forex trading allows investors to buy and sell currencies like USD, JPY, EUR, and others. A forex derivative is a contract to buy or sell a currency in the future on a specific date. The price is based on the underlying asset such as USD or GBP.

Forex derivatives fall under these categories: 

Forex Futures Contract: This is an agreement to buy or sell currency at a set price on a specific date. This is a risky investment and is taken by investors looking for high returns with a tolerance for risk. Some of the most popular trading pairs in FX futures include EUR/USD, GBP/USD, CHF/USD, AUD/USD, CAD/USD, EUR/GBP, and EUR/CHF.

Forex Options Contract: This is an agreement that allows a trader the option to buy or sell a currency at a certain price at any time during the duration of the contract. A call option is the right to buy (long position) and a put option is the right to sell (short position). Every option contract is purchased from a seller and requires a fee, known as a premium.

Forex Swap Contract: A foreign currency swap is effectively loaning one currency to a certain party in exchange for borrowing another currency. There are two types which are called fixed-to-fixed swaps and fixed-to-floating swaps. Interest is continuously paid on the principal by each party until the swap is over and the principal amounts are exchanged back at rate called the spot rate.

What are Bitcoin Derivatives?

Bitcoin has taken the financial world by storm the last few years as it soared to $20,000 and then crashed back down to $3000. During Bitcoins most recent major bull rally in 2017, the Chicago Mercantile Exchange (CME) launched cash settled Bitcoin futures. This allowed investing in Bitcoin through a regulated institution.

A Bitcoin derivative is just a regular type of derivative but with Bitcoin as the underlying asset. For example, with swap trading, Bitcoin acts as the trading pair for buying and selling other currencies like USD, JPY, and even other cryptos like ETH. If you wanted to buy a JPY swap contract using Bitcoin derivatives then you would loan Bitcoin to the platform you’re using and borrow Japanese YEN.

There are two main types of derivatives when it comes to Bitcoin, cash settled and BTC settled. Cash settled means that when the contract expires cash is delivered to the buyer based on a reference rate from an exchange. Bitcoin settled means BTC is delivered to the buyer when the contract expires.

Forex Derivatives Advantages

  • Hedging risk exposure
  • Determine price of underlying currency
  • More efficient market
  • Access to more currencies and markets
  • Take advantage of bad performing currencies vs good performing ones
  • Use high leverage

Forex Derivatives Disadvantages

  • Highly risky
  • Speculation is unpredictable
  • Counterparty risk 
  • Geopolitical issues
  • Unstable economies

Bitcoin Derivatives Advantages

  • Arbitrage opportunities between different markets
  • Trade with more Bitcoin than you own
  • Hedging to reduce risk
  • Bitcoin is highly volatile so opportunity for greater returns
  • Can trade without KYC
  • Ability to short Bitcoin during bear markets and leverage during bull markets

Bitcoin Derivatives Disadvantages

  • Highly risky
  • Speculation is unpredictable
  • Counter-party risk or exchange hacks
  • Bitcoin is highly volatile could incur higher losses
  • New technology

Regardless of the derivatives, it’s important to trade safely and learn proper risk management strategies.

Risk Warning: 

Trading Derivatives carries a high level of risk to your capital and you should only trade with money you can afford to lose. Trading Derivatives may not be suitable for all traders, so please ensure that you fully understand the risks involved, and seek independent advice if necessary. 

bitcoin forex

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Starting with Bitcoin, cryptocurrency has grown to become a controversial topic around the world. Host Eric Sciberras chats with top traditional and crypto investors, entrepreneurs, developers, journalists, and influencers in Asia and around the world to uncover the coming impact on the global economy.

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