⚡SCOPE OF FINANCIAL INSTRUMENTS AVAILABLE IN CRYPTO & #DEFI⚡
You may recall last week I wrote a 🧵about tokenized derivatives (==> twitter.com/RobotDefi/status/1547631170929627136?s=20&t=H-eVLJFLrs_3hEfTQW70QA)
That was me scratching the surface of the available financial markets on-chain.
But the rabbit hole goes deeper 👇
1/23
Diving deeper 🤿, while there are still so many instruments that I believe should be tokenized and on-chain, there are so many others that I didn't realize existed.
Let's take a look at the wonderful world of Derivatives & Financial Instruments on the blockchain
2/23
Most traders/investors are already familiar with the "spot market."
The spot market is where financial assets are traded "on the spot" for immediate delivery. This is currencies, commodities, cryptos, etc.
3/23
When you go to a CEX to buy $ETH, for example, that's the spot market.
Many exchanges, however (both CEX and DEX) also offer margin trading.
Margin trading is, essentially, where you borrow some of your position balance to make a larger trade.
4/23
For example, let's say you have $500, but want to buy $1000 worth of $BTC. You could buy that $1000, putting the other half of that purchase "on margin"
This means you'd borrow the rest of that position, giving you access to greater rewards if the trade becomes profitable.
5/23
Margin trading is risky, as the downside is also multiplied, but this is a financial instrument many institutional and experienced tradfi traders use to maximize gains.
Not recommended for newbies, but can be incredibly lucrative for advanced traders.
6/23
Derivatives: Futures
Another awesome financial instrument is the Futures Contract. A futures contract is essentially a contractual agreement to buy an asset at a predetermined price at a specified time in the future.
But what does that mean in the crypto world?
7/23
It means that, for most traders who do not hold a futures contract until expiry, you can trade cryptos without taking possession of the underlying asset.
But why would you want to do that?
8/23
For starters, it makes it easier to get in & out of positions quickly without waiting for on-chain transactions (usually it takes a minimum of 10 minutes for your $BTC to hit your wallet).
However, #crypto #futures have other advantages
9/23
Most exchanges that offer crypto futures also allow you to trade them with leverage (i.e. margin trading).
This means that you can choose anywhere from 2x to 10x to as much as 100x leverage, so for every dollar BTC moves, it's worth $100 (for example).
10/23
This is the biggest advantage to trading futures and the reason why tradfi futures traders make so much money (but also lose so much).
Futures are definitely a "big boy" financial instrument, and several CEXs and DEXs offer them.
11/23
Derivatives: Options
An Options Contract is a contractual agreement to potentially buy an asset at a pre-determined price at a set time in the future
For a premium, you can choose to NOT exercise the option, or in the case of American style, you can exercise it early
12/23
Options are a bit more complex and often used as hedging instruments, but definitely a tool in the tool belt of experienced tradfi traders.
13/23
Derivatives: ETFs
Exchange Traded Funds (ETFs) are basically a basket of assets (it can track indices, sectors, etc) much like a mutual fund...except it's traded like a regular token on the spot market.
14/23
For example @kucoincom offers ETFs that are comprised of "leveraged tokens." These are baskets of tokens that represent, typically a 3x, position in the cryptocurrency.
This allows traders to take advantage of leverage without trading on margin.
15/23
Derivatives: Perpetuals
Perpetual Contracts (Perps) are futures contracts that don't expire. These carry a premium as well (much like options) but they offer the convenience of not having to worry about closing positions before expiry, or taking ownership of the asset
16/23
Derivatives: Indices
Indices (Indexes...and specifically their futures contracts) are a standardized tracking of a basket of assets.
For example, the S&P 500 is an index, and offers futures contracts.
As is/does the NASDAQ 100 and DJIA
17/23
In crypto, indices can be any number of tracked assets that allow the investor a broader range of exposure.
The advantage of investing in an index is, ideally, lower volatility while taking advantage of the trend of an entire sector.
18/23
These are the types of complex financial instruments that are available to crypto traders today, illustrating just how much crypto and defi level the playing field for investors and traders.
19/23
You don't need to be an accredited investor (requiring upwards of $1mil)
You don't need a broker or manager to execute these trades for you
You don't even need a large amount of capital for collateral, as most tokens offer fractional investment.
20/23
Such is the power of the blockchain and digital currencies.
For those interested, here is a list of platforms I found that offer the previously mentioned financial instruments:
Kucoin (@kucoincom) - Spot, Margin, Futures, Perps, ETFs
dYdX (@dYdX) - Spot, Perps
21/23
Gains Network (@GainsNetwork_io) - Margin, Perps
Scalara (@Scalara_xyz) - Indices
Hegic (@HegicOptions) - Options
Synthetix (@synthetix_io) - Perps, Forex
GMX (@GMX_IO) - Perps
Dopex (@dopex_io) - Options
22/23