CoinGecko's Beginner Guide to Crypto Derivatives

by Jin

We’ve just released CoinGecko Derivatives earlier, and we’re completing the circle now with CoinGecko’s Beginner Guide to Crypto Derivatives! This is a guide intended for beginners, and if you are unfamiliar with what derivatives are, this will give you a bird’s eye view on the entire scene to get you started!

Everyone is talking about…Crypto Derivatives?

It’s the talk of the town right now, but why all the hooha? Let’s explore it with a little bit of data!

BitMEX trading volume, 5 Aug - 29 Oct 2019

BitMEX’s perpetual futures trading volume in comparison on 29 Oct 2019

At the time of writing (October 2019), the most popular derivative exchange is BitMEX, peaking out at a daily trading volume of approximately $11.5 billion in late October. Web traffic wise, SimilarWeb estimates that BitMEX averaged nearly 11 million visits per month since August 2019, which is likely enough to make them a top-10 cryptocurrency website.

In addition to BitMEX, several other exchanges such as Binance, Kraken, Huobi, and OKEx are also offering derivative products. You can be sure that it is not at a one-off occurrence - derivatives are thriving based on the data that we are seeing. 

In our Q3 Cryptocurrency Report released earlier this month, we noted that CoinGecko only had 6 derivative exchanges by 1st July 2019. Fast forward to 29th October 2019, we now have 22 derivative exchanges with a recorded 24 hours volume of $19.4 billion ($0.88 billion per exchange). For an emerging market segment, this is nonetheless impressive especially when compared to the more mature spot market which recorded $67.9 billion across 370 exchanges in 24 hours ($0.18 billion per exchange).

Numbers aside, there are also real, practical reasons to why derivative contracts are popular but we’ll go through those after we’ve explained derivatives to you!

What are Derivatives?

How we felt exploring the world of crypto derivatives. (Image Source)

By definition, derivatives refers to financial instruments (contracts) whose values are derived from an underlying asset (eg. bitcoin, gold, potatoes). When someone trades derivatives, they are essentially buying/selling contracts that represent the actual asset.

Derivatives also exist in traditional financial markets since many years ago. For example, precious metals such as gold and silver have been offered as Futures since 1974 and 1933 respectively by CME. Gold has been traded since ancient times in the form of barter/spot exchange, and it’s fair to say that derivatives are an evolution to trading methodologies. Similarly, as the cryptocurrency market matures we can expect new cryptocurrency derivative products becoming available.

In the financial world that is derivatives, there are three main types of products:

  1. Options: An agreement between two counterparties that provides one with the right but not an obligation to transact in the future.

  2. Forwards/Futures: An agreement between two counterparties that obligates them to transact in the future based on the contract terms set.

  3. Swaps: An agreement between two counterparties where both agree to periodically exchange fixed & floating rates over a period of time.

Now we understand that this all seems like a lot to digest, so keep reading on for a little “spooky” surprise that’ll help you understand these more easily! 

Derivatives in Crypto - Options

We’ve put together a very “spooky” analogy (just in time for Halloween 👻) that’ll bring you through the concept of Options. Behold:

In our analogy, we assume that an option is sold for $5 with an expiry date on Halloween Day. The buyer of said option is bullish on the costume price (expect future price to go up), while the seller is bearish on the costume price (expect future price to go down). Here are the payoffs to the buyers and sellers in both scenarios.

Halloween Day Event



Costume price goes up to $200

Can buy costume for $100. Total expenditure is $105 (including $5 premium). 

Made $5 (premium paid by buyer), and has to sell costume to buyer at $100 (forgoing profit upside).

Costume price goes down to $30

Will not buy the costume for $100. $5 paid as premium is non-refundable.

Made $5 which was the premium paid by buyer. 

In essence, you can see this as a form of “insurance” where the option contract has allowed our buyer to hedge himself against a price increase for a premium of $5 to have the right to buy the costume at $100. 

The above analogy describes how a Call option works.

Derivatives in Crypto - Futures

Futures is another form of derivatives, and once again, we’ve put together something that we think can help explain it in simple terms for you 👻:

A summary on what happens:

Halloween Day Event



Pumpkin price goes up to $200

Has to buy for $100 (hedging against price increase)

Has to sell for $100 (obligated to, unlike options - forgoing profits)

Pumpkin price goes down to $30

Has to buy for $100 (obligated to, unlike options)

Has to sell for $100 (hedging against a price decrease)

In our pumpkin example above, the futures contract has allowed our buyer to hedge himself against a price increase by locking the price of the pumpkin for $100 by Halloween Day. Similarly, a futures contract has also allowed our seller to hedge himself against a price decrease by locking the price of the pumpkin for $100 by Halloween Day.

What happens here is especially useful in the commodities market. Imagine the crude oil market where the seller must maintain a certain amount of revenue to remain operational - they can enter a futures contract with a buyer to ensure that they will have enough money regardless of the market conditions.

Derivatives in Crypto - Perpetual Swaps

Perpetual swaps are unique to crypto, and is reported to be the brainchild of BitMEX. It is also the most popular product, with nearly $10B in daily trading volume at the time of writing (29 Oct). They are similar to future contracts, except that it does not have an expiry date. 

Perpetual swaps gets its name from the fact that it never expires, but how can you settle a contract when there is no expiry date? BitMEX’s ingenuity shines through here with what’s known as the funding mechanism, designed to drive convergence of contract towards the index price (since BitMEX doesn’t trade Bitcoin, they rely on aggregated prices from various exchanges to mimic the spot market price).

To keep this guide succinct, we will not dive too deep into perpetual swaps (a topic which deserves its own guide altogether). Perpetual swaps are complex trading products.

Reasons to Trade Derivatives

  1. Increased Liquidity & Exposure - Basically, you can trade and have exposure to the price movement of an asset, without actually ever owning the asset. In essence, this allows for a much more liquid market as the actual asset does not ever get exchanged, and this leaves traders with far more liquidity and flexibility compared to spot trading (a.k.a regular buy/sell).

  1. Hedging/Volatility Protection - As illustrated via our analogies earlier, derivatives can help you protect yourself against the volatility of the market. By entering a contract with another party to fix the buy/sell price at a certain level, your bottom line is protected regardless of the market conditions.

  1. Speculation & Leveraging - The volatile markets that is cryptocurrency works well with the leveraging options. Investors often use derivatives to bet on future prices of an asset and it is easier to make large speculative plays due to the ability to leverage on their positions. With leverage, the potential upside (or downside) is much higher. 

Arguably, the crypto derivatives market is still in its infancy, and the move towards derivative products can be seen as either a sign of innovation or steps to maturity, or both. Here at CoinGecko we’re ready and all geared up to provide you with the latest tools and datasets you’ll need to conquer the market. Read on to find out what we’ve prepared for you!

Derivatives Market Overview

As a trader, we know how important it is to be able to see the market at one glance, so we’ve put together a Derivative Overview page that aggregates all derivative products for you.

We’re sorting by Open Interest, which can be defined as the total number of outstanding derivative contracts, which are options/futures that have yet to be settled.

Open interest number only changes when both a buyer/seller enters the market and make a deal by contract, or when buyer/seller closes their positions. 

In other words, a seller can put an order of 1,000 BTC but if there is no seller who will take said order, the open interest of the market remains unchanged.

Open interest is commonly used in the derivatives market, and we think it’s a good fit to be used to present the market as a whole. In addition to that, open interest can also be used as an indicator of trend strength as a rising open interest generally indicates additional money/interest entering the market. It’ll be interesting to watch how the open interest moves along with the market.

In addition to showing all contracts, we also added a new section to show all derivative exchanges on CoinGecko so you know where to trade, as well as revamped exchange profile pages for derivative exchanges, such as BitMEX’s page. You can read the full details about our implementation here on our blog post.

Serious Traders Handbook - Terms & Definitions

For the serious traders, we’ve put together a small section in our Q3 Cryptocurrency report explaining some of the more advanced terms. If you’re looking to get started in derivatives trading, we highly recommend that you go through the slides for a succinct explanation on them:

Closing Thoughts

That’s it for CoinGecko’s Derivatives guide - we hope that this guide has been useful for you and that you’ve enjoyed going through it! Crypto is such a fast-moving space that it may seem impossible to keep up with development all the time but we’re super excited to keep innovating new features for our fellow users.

If you have someone in mind who’s wondering what derivatives are, do share this guide with them!

Tell us how much you like this article!


Jin is a Product Manager at CoinGecko. In his free time, Jin enjoys messing with crypto related stuffs on a slightly technical side and generally learns about crypto as he munches on snacks. Follow the author on Twitter @jin_8315

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