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Crypto derivatives

The cryptocurrencies market have never been stable, and yet, people still believe it can be the future of our economy.

Little by little, businesses all around the world began accepting cryptocurrencies as a legit payment option, including various brick-and-mortar shops and gambling venues the likes of the Slotocash online casino.

As the cryptocurrency market developed, the affiliate crypto derivatives started to blossom as well. While the value of all cryptocurrencies, and Bitcoin, in particular, fluctuated – people made a point of guessing whether the coin’s value will rise or dive, placing bets on the outcome.

Those websites have been operating for quite some time now, but their future is at stake, as various countries, including the UK, are contemplating banning amateurs from trading in crypto derivatives.

Crypto Derivatives Explained

Before we dive into analysing the current changes that take place in the market, it is important to get the basic terminology down pat.

The cryptocurrencies themselves are considered as financial assets, and people use them to settle payments immediately, which means the currency switches hands from the seller to the buyer without delay.

Crypto derivatives, on the other hand, rely on the value of the cryptocurrency, but the transaction is set to be completed at a future date. In this case, the seller and the buyer are trading contracts instead of dealing with the actual asset at hand.

When people decide to get involved with crypto derivatives, they sign a financial contract that derives its value from the expected value the cryptocurrency will have in the future.

The most common types of derivatives include two main products:

  • Crypto futures – The seller and the buyer are obligated to complete the transaction at a future date, sticking to the predetermined prices.
  • Crypto options – After setting a timeframe and deciding on a fixed price, the seller and the buyer have the option to complete the deal, but they are not obligated to do so.

Experienced investors often use those derivatives as financial tools to perform two main tasks:

  1. Protect the cryptocurrency from volatility, as you predetermine the price of the currency, and even if its value drops exponentially – the value of the derivative won’t change for a set timeframe.
  2. Use the derivative for hedging, reducing the risk of investing in the cryptocurrency. Investors can use a specific type of options called “put options”, which means that the value of the options contract will increase if the price of the cryptocurrency goes down.

That is the general idea behind crypto derivatives, but many people use those financial instruments for an additional purpose: gambling. There are various apps and websites out there that monetize on the unstable state of Bitcoin and other cryptocurrencies.

Some apps, for example, hold a competition every five minutes, allowing people to guess whether the value of the coin will drop or rise in this time frame, and place bets along the way.

British authorities are contemplating forbidding people from investing in crypto derivatives, and the only question is: why?

The Reason Behind Upcoming Changes

According to the Economist, the British Financial Conduct Authority (aka the FCA) is contemplating imposing a ban on all crypto derivatives by 2020, preventing non-accredited investors from dealing with those products.

According to the FCA, crypto derivatives pose a high risk for consumers, as they can suffer some major losses unexpectedly. It has been estimated that British investors lost approximately $492m between 2017 and 2018, possibly because amateur investors are not equipped to deal with crypto derivatives.

While the FCA believes the ban will be able to reduce losses by $287m, experts think the move will not produce the expected results. Some think that the consumers will start investing in unregulated cryptocurrencies instead, which is why the ban is irrelevant.

Others claimed that the FCA doesn’t have enough reason to ban crypto derivatives, and some even encouraged concerned parties to contact the FCA and express their objection of the ban.

In Conclusion

There is still some time to try and nullify the ban, as the decision regarding the issue is set to be finalized in 2020, so only time will tell what the future might bring.

Featured image: bitrates.com

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