Examining Bitcoin Derivatives Market – Bitcoin Magazine: Bitcoin News, Articles, Charts, and Guides

The below is an excerpt from a recent edition of the Deep Dive, Bitcoin Magazine‘s premium markets newsletter. To be among the first to receive these insights and other on-chain bitcoin market analysis straight to your inbox, subscribe now.

Yesterday’s Daily Dive took a look at some of the structural changes in the bitcoin derivatives market over the course of 2021 and what they mean.

First, what is a derivative?

A derivative is a contract between two (or possibly more) parties whose value is derived from one or more underlying assets. A contract speculating on the price of bitcoin six months from now is an example of a derivative contract.

Why does this matter, and how does it shape underlying supply and demand dynamics in the bitcoin market?

Derivatives and leverage can most certainly whipsaw price, yet what matters for the bitcoin market is the spot market (i.e., real dollar or other fiat demand to buy BTC). Derivatives and futures contracts are just directional bets on what the spot price will be.

However, derivatives markets offer the ability to use leverage to increase position size. An entity can take one bitcoin worth of capital and place trades with 10 bitcoin worth of buying power, however a 10% move in either direction can double your money, or wipe your account entirely.