What is derivatives?

Contracts whose value is based on an underlying asset's price rather than on owning the asset itself.

futures, perpetuals, and options are the common crypto derivatives. Retail access to them is restricted in a number of jurisdictions, so an exchange's derivatives products may be unavailable exactly where its spot market is open, and that split is a licensing question rather than a technical one.

The important separation is between exposure and ownership. A derivative gives you the first without the second. You cannot withdraw a perpetual contract to a hardware wallet, and if the venue holding it fails, there is no underlying asset anywhere to recover.

How it works

Three products cover most crypto derivatives volume.

Illustrative comparison; contract specifications differ by venue.

All of them are margined, which is where the risk changes character. You post collateral rather than the full notional, so a move against you consumes collateral several times faster than the same move would affect a spot holding, and breaching the maintenance margin triggers liquidation rather than a request for more funds.

Settlement is almost always in cash rather than in the asset. A Bitcoin perpetual settles in a stablecoin or in Bitcoin as collateral, and no Bitcoin changes hands as a result of the contract.

Prices come from an index price built from several spot venues rather than from the derivatives book itself, which is what stops a thin derivatives market liquidating positions on its own wick.

Example

Illustrative. You post 1,000 dollars of collateral and open a 10,000 dollar long perpetual, so 10 times leverage. A 5 percent fall in the underlying is a 500 dollar loss, half your collateral. A 9 percent fall approaches liquidation, at which point the position is closed and the collateral is largely gone. The same 9 percent fall on a 1,000 dollar spot holding is a 90 dollar unrealized loss that recovers if price does. Leverage did not change the market. It changed how much of the move you can survive.

Why it matters when you buy

If your aim is to hold an asset, spot buying does the job with no funding, no roll, and no liquidation, and it leaves you with something you can withdraw. Derivatives availability varies sharply by jurisdiction and is one of the things that differs between an exchange's global and local entities. The exchange pages record what is offered where, and the fee comparison covers spot costs.

Related terms

futures — dated contracts; perpetuals — contracts without expiry; funding rate — the cost of holding a perpetual; leverage — the multiple applied to your collateral; liquidation — what happens when collateral runs out.

Questions

Do I own the asset if I hold a derivative?

No. You hold a contract with the venue whose value tracks the asset. There is nothing to withdraw, and if the venue fails, you have a claim rather than coins.

Why can't I access derivatives on my exchange?

Because retail derivatives are restricted or prohibited in several jurisdictions, and exchanges geoblock the products accordingly. The same platform frequently offers them in one country and not in another.

Are derivatives cheaper than buying spot?

Trading fees on derivatives are often lower per unit of notional, and holding costs, funding or roll, apply continuously and can exceed spot fees over any meaningful period.