Derivatives Trading
Introduction
Derivatives are financial contracts that allow traders to trade the price of an asset without owning the underlying asset.
There are two popular derivatives on Demex, futures and perpetuals.
Futures contracts are agreements between two parties to buy or sell an asset at a predetermined price and time in the future. They can be either cash settled, where cash is exchanged, or physically settled, where the underlying asset is exchanged. Futures derive their value from the underlying asset and serve as a form of derivative.
Unlike traditional futures, perpetuals are a type of futures derivative that does not have an expiry date and allow for continuous trading without the need for contract rollovers.
The following table provides a quick comparison between spot trading, futures contracts, and perpetuals:
| Instrument | Can go short | Can hold position indefinitely | Can use leverage | Must hold underlying |
|---|---|---|---|---|
Spot | Yes | |||
Dated Futures | No | |||
Perpetual Swaps | No |
Key Advantages
Trading via derivatives offers several advantages.
Ability to bet on both a rise or fall in price
Futures and perps provide traders with the opportunity to profit when they have a negative forward view on an asset.
Since traders can choose to go either long or short on an underlying, it allows them to profit from not just upward price movements, but also downward price movements (via shorting).
This allows a trader to be profitable in any market environment, whether bullish or bearish.
Multiplied gains with leverage
Traders can access derivative contracts with leverage (of up to 50x on Demex), allowing them to take larger positions with the same collateral. This gives higher potential gains (or losses).
For example, let's assume that you have $100, and the price of Bitcoin is currently $100 (haha). With spot trading, one can only purchase 1 BTC, and if the price of Bitcoin increases to $150, you will gain $50 (or 50%) upon selling the Bitcoin.
With the perpetual contract on Demex however, you could have bought 50 BTC (or $5000 worth of Bitcoin), and the same price increase would have netted you a gain of $4900 (or 4900%) upon closing the position, or a 98x increase in your PnL.
Fair warning however - the increase gains comes with increase risks: if the price of Bitcoin had dropped to $98 instead, the position would have been liquidated for a complete loss!
Ease of trading
The world of cryptocurrency can be very complicated as there are dozens of blockchains, wallets, and dapps to use just to buy an asset you are looking for.
Perpetual trading allows you to skip all these complications as perp trading does not require the underlying exposure or custody of the asset.
If Demex has a perp market for an asset you are looking for, you can get exposure to it just by using USD as collateral to trade it.
Lower fees
Compared to spot trading, crypto perpetual trading often involves lower fees. Traditional exchanges may charge trading fees and spreads, while perpetual contracts typically have a single fee known as the taker or maker fee.
This fee structure can be more cost-effective for active traders, especially when combined with leverage for efficient capital utilization.
For more detailed information about the Demex trading fees, visit this page.
Earn funding fee
The funding rate is a unique feature of crypto perpetual contracts. It is a mechanism that helps keep the contract's price aligned with the underlying asset's price. This happens every hour on Demex.
When the funding rate is positive (green), long traders pay short traders, and when it is negative (red), short traders pay long traders.
Traders can take advantage of this by strategically opening positions to earn the funding rate income.
For instance, if the funding rate for a BTC perpetual contract is negative, long traders earn funding fee from short traders.
You can find more information about how the funding rate works here.
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