The mining industry has ventured into the crypto space with a bang, bringing several opportunities for crypto enthusiasts. The mining industry is mainly responsible for controlling the entire circulation of the space, thus providing stability to the industry. In 2021, Bitcoin miners made over $2.3 billion in debt and $3.9 billion in equity. According to research, the cryptocurrency mining market was worth around $1.49 billion in 2020 and is expected to make a CAGR of 7.05% between 2022 and 2028. By 2028, the crypto mining hardware market could be worth more than ~USD 2.58 billion.
What Are the Main Crypto Options Trading Strategies?
Trading crypto options in the crypto market has become a common exercise for traders and crypto enthusiasts as it fetches lucrative profits in a short span of time. Options on cryptocurrency trading enable crypto traders to hedge risk in the highly volatile crypto market. Crypto options are like insurance for traders where buyers and sellers take the maximum profits using different crypto trading strategies. Crypto option trading is gaining exponential attention in the crypto derivatives market.
To generate the maximum profits out of the crypto market, you need an advanced and effective options trading strategy. A trading strategy is generally a plan that helps you execute your trades with the lowest loss or maximum profit. A crypto options trading strategy depends on the frequency of making trades, digital assets on which a trade is taken, and investment size.
In this section, we will discuss the most used and profitable crypto options trading strategies so that you don’t have to worry about your returns on trades. However, it is advised to make your own plan and strategy depending on your requirements, as the following strategies are focused on the general crypto market sentiments.
- Day Trading Strategy: A crypto day trading strategy allows traders to take complete advantage of crypto’s volatility throughout the day. Digital assets are highly volatile, which goes in favor of traders to make profits in their desired ways. A day trader executes several call and put options, where buying low and selling high is the main motive to gain multiple winnings by the end of the day. However, it sometimes gets hard to manage various trades, and it is recommended to use trading applications or trading bots to execute trades on behalf of the trader.
- Scalping: Scalping is a popular crypto trading strategy that is used to make profits in small price movements. The scalping strategy is effective as the crypto market is highly volatile, resulting in high chances of profits within a fraction of a second.
- Protective Put: In this strategy, a trader adds put options to the assets he/she already owns. Suppose X buys 10 BNBs at a price of $100 each, and X is doubtful about a bearish trend that may decline BNB’s price. So, X buys put options at a strike price of $95 by paying a premium of $5. If X’s doubt becomes true and BNB touches $50 per coin, X can sell put options to balance the loss made when buying BNBs at $100.
- Covered Call: In this options trading strategy, a trader purchases crypto and then sells its call options. Through this strategy, the trader makes an extra profit by collecting premiums.
- Long Straddle Strategy: If the market is highly volatile, and it is impossible to predict the correct price movements, then the straddle strategy joins. In this strategy, a trader buys both call and put options on the same cryptocurrency with the same strike price and expiry date. It allows traders to make gains if the market climbs up or drops.
- Long Strangle Strategy: This strategy is similar to the straddle strategy as the trader buys call and put options on a specific cryptocurrency above and below the market price, respectively. However, strangle strategy is less profitable compared to the straddle strategy.
- Swing Trading: A crypto swing trader takes advantage of an ongoing or incoming market sentiment that will impact the crypto prices. Swing trading lasts for a few days or even a month. This strategy is also referred to as BTFD (buy the f’n dip), meaning that traders buy crypto at a low price and sell it at a high price.
- Position Trading (HODL): HODL, or hold on for dear life, is dedicated to long-term crypto market investors. This is similar to swing trading, as a trader or investor buys crypto in the dip and sells at a high. But the main difference is the long time period between opening and closing the position.
What Are the Types of Derivatives in Crypto?
A crypto derivative is a contract in which a value of an asset is determined. In simple words, derivatives derive the value of assets like stocks, bonds, interest rates, commodities, fiat currencies, and cryptocurrencies.
Crypto derivatives are traditional derivatives that are a representation of a contract that derive their value from an underlying asset. Such assets are pre-calculated to be sold at a specific time and price. For example, an Ethereum derivative works parallelly with the value of Ethereum. The most used crypto derivatives are crypto futures, crypto options, and perpetual contracts.
What Are Crypto Futures, and How to Trade Them?
Crypto futures enable investors to hedge against the highly volatile crypto market and ensure they can purchase or sell a specific crypto asset at a predicted price in the future. Futures are an agreement where a buyer and a seller get involved in selling a specific digital asset. This type of derivative contains an expiry date and strike price and is executed ahead of time. Future contracts are popular among institutional investors, which they use to predict the future price movements of a digital asset. However, it comes with deadly losses with lucrative profits depending on the market sentiments. For example, if a trader buys a future contract of Bitcoin worth $40K when BTC trades at $40K. If Bitcoin increases by $20K and trades at $60K, then the total profit from the contract will be $20K. Conversely, the trader losses if BTC goes below $20K, leading to a $20K loss.
How to Trade Ethereum Futures?
To trade Ethereum futures, a trader needs to decide the timeframe he wants to trade within. Usually, crypto derivative exchange offers weekly, bi-weekly, quarterly options, and more. Traders need to choose the predicted price within a specific period and buy the contract accordingly.
For example, suppose a trader wants to trade a weekly Ethereum futures contract where each contact is valued at $2 when the ETH price trades at $1,300. In that case, the trader needs to invest $650 (ETH current price/ each contract’s value) or buy 325 futures of Ethereum to open a position. It becomes a betting as a trader bets on ETH price whether it will go up or down within the given period. The exchange then starts matching with another trader who goes against the betting. Finally, the future contract gets settled, which ends up in a loss for a trader whose prediction goes against the market. To trade futures, you need to follow the following steps:
- Navigate to the futures section by going to the trading option in your crypto derivatives exchange.
- Next, choose the crypto and add a number of contracts you want to trade.
- Confirm the transaction, and you are all set to go.
What Are Crypto Options, and How to Trade Them?
Crypto options offer investors low cost and low risk compared to futures contracts. Crypto options allow traders to buy or sell a contract on or before the expiry date with a specific strike price. Crypto options come with two distinct types of agreements: one is the buy or call option, and the other one is for the sell or put option.
There are several types of options: call and put options, American and European options. A call option allows traders to buy a digital asset contract at a fixed strike price and expiry date, whereas put options enable traders to sell a contract at a fixed strike price and expiry date. Additionally, American options allow traders to sell before the expiry date, and European options are instructed to sell on the agreed date.
How to Trade Ethereum Options?
Call and put options are similar to futures as a trader goes long or short on a cryptocurrency. However, as mentioned earlier, options trading is less risky, and it costs less investment than futures. A call option allows the trader to buy Ethereum at an agreed price within a specific expiry date, and a put option offers the trader to sell Ethereum at an agreed price within a fixed time.
For example, a trader buys a monthly expiry call option of Ethereum when ETH trades at $1,200. If ETH ends the month with a price of $1,500, then the trader pockets the profit generated from the call option. The same thing goes with the put option, as traders predict the bearish move of Ethereum. However, it is to be noted that traders may lose all of the funds invested in the option if the prediction goes against the wind. To trade crypto options, these are the steps you need to follow:
- You first need to head over to the trading section of your crypto exchange and select the trading options.
- From there, you need to choose the crypto on which you want to do option trading.
- Now, you need to choose either the call or put option with a preferred expiry date. Once you confirm the transaction, your contract will be on your dashboard with live profit or loss.
What Are Perpetual Contracts, and How to Trade Them?
A perpetual contract is also known as a futures contract or perpetual swap, which is the most profitable in a crypto derivatives exchange. In the crypto world, we can buy perpetual contracts of Ethereum, Bitcoin, Litecoin, or any other cryptocurrencies. Unlike futures and options that have a fixed period, perpetual contracts have an indefinite time as long as the holder pays the maintenance fees.
The maintenance fee is directly proportional to the amount borrowed to short or long the cryptocurrency. The fee increases according to the leverage and fund used to buy the contract.
How to Trade a Perpetual Contract?
If many long-term investors buy perpetual contracts with the spike of the crypto, then there will be no place for short positions, leading to a positive funding rate.
A positive funding rate means that all long position holders must pay short position holders. Conversely, short position holders pay long position holders when there is a negative funding rate. This mechanism aims to incentivize both the long- and short-term holders. To trade perpetual contracts, traders need to follow the following steps:
- Log in to your crypto exchange platform that offers a perpetual crypto contract.
- Select the crypto you want to buy a perpetual contract for. Choose limit order or market order and maintain the leverage ratio and click ‘Buy Long’ or ‘Sell Short,’ whichever you want.
- Review the transaction, and you are done.
Mine Crypto Coins on RollerCoin for Free!
RollerCoin is a virtual mining simulator where you can mine different cryptocurrencies for free and generate lucrative profits amid the crypto winter. While hardware mining costs massive investment, which stops miners from mining, RollerCoin offers multiple ways to mine crypto with zero cost. You can begin your mining journey with RollerCoin, as the platform provides numerous ways to mine crypto. You can mine free Bitcoin, Ethereum, and Dogecoin just by playing exciting 8-bit arcade games and owning a virtual mining world. Your profitability also depends on your gameplay and miners, as you can grow your mining empire by adding and upgrading more miners.
RollerCoin offers miners to be the boss of their virtual mining world and enjoy the journey by playing 8-bit arcade games, which will also upgrade mining profitability. As you dig in, RollerCoin allows multiple ways to withdraw crypto profits to a crypto wallet or reinvest in buying more upgrades to boost your mining potential.
Why Are Crypto Derivatives Important?
Crypto derivatives have emerged since the advent of the crypto space and its high volatility. This sector has attracted billions of dollars in volume from the crypto market as it plays a significant role in driving the crypto industry forward. The crypto market has flourished into an infrastructure with over 10K crypto coins that have different use cases in the crypto economy. Various developments in the crypto space have evolved and modernized the industry, and crypto derivatives are one of them.
The application and contribution of crypto derivatives go beyond imagination as it brings significant value to investors’ portfolios and crypto infrastructure. Let’s find out the importance of crypto derivatives to the crypto economy.
Crypto derivatives allow traders and investors to diversify their portfolios and lower risks that are usually associated with the crypto market. Traders can invest in different contracts on multiple crypto assets with advanced trading strategies to diversify their crypto portfolio and boost winning potential. Furthermore, advanced trading strategies increase the liquidity of the crypto market.
Increase in Liquidity
The liquidity of a digital asset indicates the ease of executing a transaction. Crypto derivatives increase the liquidity of the crypto market as traders continuously open and close a position. In a stable liquid market, it becomes easy to trade contracts as there are plenty of traders to carry forward the position. A liquid market also offers low transaction fees and less slippage, attracting more institutional investors to invest in the crypto market as the sentiments and conditions become favorable.
Crypto derivatives allow traders to lower their risk by eliminating the risks involved in highly volatile crypto assets. Derivatives also identify risk when options contracts are overbought or oversold. This brings risky sentiments as traders rush to buy and sell an asset due to a piece of market news that may impact its price.
Optimized Price Discovery
Price discovery of a digital asset is the primary function that everyone wants from the crypto market. Crypto derivatives ease the way to find the price of an asset by enabling investors or traders to go for long or short. The mechanism of crypto derivatives smoothens the price discovery of an underlying crypto asset by enhancing market adjustments. As price discovery is enhanced, traders and investors get more reliability on the asset they are investing in. Crypto derivatives strengthen the crypto economy as traders get more confidence in their investments.
There are two main purposes for using derivatives trading in crypto: speculation and hedging.
Derivatives have a significant role in hedging as it lowers the risks involved in drastic price movements of the cryptocurrency market. Hedging involves opening positions opposite to the portfolio to reduce any losses in the market. This technique is executed by professional traders to secure their portfolios from huge losses.
For example, futures contracts can protect your investments without changing your current crypto holdings. You can hedge your portfolio with a fraction of your total investment. For instance, if your portfolio is valued at $50K, you can secure it by hedging with a short position in a futures contract. A 10x contract can be purchased with $5K, which takes 1/10 of your portfolio’s total value.
Derivatives bring different scenarios to make profits even in the bear market. For example, if you purchase Ethereum at $2,000 and its price drops, then you make losses. However, that’s not the case for futures contracts, as you can still make profits by opening a short position if Ethereum goes down. A futures contract allows traders to flow according to the market’s volatility and sentiments, an excellent purpose that derivatives serve.
Derivatives also provide excellent leverage to gain more exposure to an asset with low cost. Crypto derivatives exchanges like Binance provide up to 125x leverage than the initial margin, resulting in huge profits even with a small investment plan.
Main Pros and Cons of Using Derivatives
However, crypto derivatives offer tempting opportunities with multiple ways to generate maximum profit from the market, but it comes with ample disadvantages, too. In this section, we will discuss the main pros and cons of using derivatives.
- Low Transaction Fees: Derivatives contracts bring enough liquidity to the market, which lowers the risk of huge price movement and eliminates high transaction costs.
- Risk Management: Derivatives diversify investment portfolios and reduce the risk that comes from the volatile crypto market.
- More Leverage: Several crypto derivative exchanges offer excellent high leverage that requires less investment to make high profits.
- Market Efficiency With High Liquidity: As derivatives bring more liquidity to the market, every operation goes smoothly on the network and helps the market stabilize by increasing efficiency.
- Regulations: As the crypto market keeps evolving, it attracts the attention of regulatory bodies to regulate the usage of such derivatives. There are many countries where crypto trading is banned.
- High Risk: Derivatives contracts are subject to volatility and can experience massive fluctuations, which can lead to a significant loss.
How to Trade Crypto Derivatives Efficiently?
There is no such formula that can ensure expected profits in the crypto derivatives market. However, traders can do some practices and strategies to make the most out of the market. It is up to the trader to choose the suitable contract according to market sentiments. For example, it is recommended to go with options trading if the market is bullish. For a bearish market, futures contracts are the best choice to trade. However, if there are no expected movements in the market, then it is advised to go with a perpetual contract to be on the safe side.
Another essential thing to trade crypto derivatives efficiently is to choose a trustable crypto derivatives platform that is well established and offers advanced trading tools.
Crypto derivatives are an excellent option for traders to make a significant profit from the crypto market daily as it eliminates the need to do a hectic job. However, it can turn out to be risky due to the market’s volatility. It is advised to do your own research and conduct experts’ opinions and investment advice with trading strategies before trading in crypto derivatives.