Bitcoin Derivatives: An Easy Way To Get Rekt
There is an old saying that if you don’t know where the yield is coming from, then you are the yield — and that’s going to apply with bitcoin derivatives. The Bitcoin market has been a wild ride, with prices swinging up and down dramatically. Among the many investment opportunities are bitcoin derivatives like futures, options and perpetual contracts. However, these leveraged products aimed at sophisticated traders can just as easily wreck unsuspecting retail investors.
What Are Bitcoin Derivatives?
Derivatives are like side bets on the future performance of an underlying asset like Bitcoin, without directly owning or trading the asset itself.
- Futures are like pre-ordering something at a locked-in price for a future delivery date. For example, pre-ordering concert tickets months in advance at a set price, no matter how popular and expensive they become by the concert date.
- Options are like having a temporary reservation to buy something at a preset price, without obligation. For example, paying a small fee to have exclusive 30-day dibs on buying a limited-edition item at a certain price if you want it.
- Perpetual swaps are like having an open, rolling bet on an asset’s price movements. For instance, betting red or black on a roulette wheel that never stops spinning, letting you cash out anytime.
The key advantage of derivatives is gaining price exposure and potential to profit from an asset’s movements, without actually carrying the full cost and hassle of owning the underlying asset outright. It enables more flexibility and leverage in financial positioning.
The Leverage Trap
The biggest attraction and risk of Bitcoin derivatives is leverage. Many platforms allow trading with 100x or even greater leverage. This means a small $1,000 stake is turbocharged to control $100,000 worth of Bitcoin exposure.
While leverage can massively amplify profits on accurate predictions, even a tiny 1% move against the trader’s position could trigger a margin call — like having your full home downpayment wiped out over a $100 disagreement. Getting “rekt” with highly-leveraged derivatives is incredibly easy, like trying to surfboard on a tsunami.
Not For Novices
Derivatives are already complex financial instruments tailored for professional traders. Using them if you don’t have proper knowledge would be like a newly licensed teenage driver trying to operate a fighter jet. However, Bitcoin derivatives are even riskier as the underlying asset (Bitcoin) is highly volatile. The high leverage, around-the-clock trading, and complex order types make it an extremely challenging arena for retail investors.
Many have learned the hard way that the fast-paced Bitcoin derivatives market is not a get-rich-quick scheme. Without proper risk management, trading these products is akin to gambling away your life savings against seasoned professionals in a ruthlessly competitive environment.
K.I.S.S
The “Keep It Simple Stupid” acronym is solid advice when it comes to Bitcoin investing. Trying to generate extra yield on top of an already outstanding asset is often an exercise in unnecessary complexity and risk.
Bitcoin itself has been one of the best performing assets of the last decade without any derivative plays. Its scarcity and adoption as a store of value have driven enormous appreciation over time. While Bitcoin doesn’t technically generate “yield” like interest or dividends, its price appreciation has outpaced most other investments if you simply buy and hold patiently.
Rather than getting drawn into the leveraged derivative minefield, the smarter approach for many may be to accumulate and hold Bitcoin itself for the long-term. As adoption grows, being a disciplined HODLer of the underlying asset could be among the highest yielding strategies of all. So keep things simple — don’t get rekt chasing extra yield on an asset that can already make you wealthy through patience.
4/17/24
Conor Jay Chepenik
