- Coinbase is a secure platform that makes it convenient for investors to buy, sell and hold cryptocurrencies such as Bitcoin and Ethereum.
- Coinbase had recently been listed on the American stock exchange, the tech-heavy Nasdaq.
- The cryptocurrency exchange has filed an application with the National Futures Association to incorporate derivatives options on its platform.
What did Coinbase announce?
Coinbase, one of the leading cryptocurrency exchanges has announced that it plans to expand its primary operations. It has announced that it will try to gain approval for activating the derivatives segment on its platform. The company will file an application with the National Futures Association to incorporate derivatives options on its platform. These derivatives will include futures and options contracts for traders to capitalize on short-term volatility and price movements.
Futures and options are complex financial instruments which is why necessary approval from the National Futures Association is a must. If the approval goes through, Coinbase and its subsidiaries will join major exchanges such as Binance, FTX, Kraken and OkEx to offer derivatives to the people using its platform. Coinbase has taken steps to broaden their services after raising funds from the general public through the issue of shares. Coinbase had launched its initial public offering in April, 2021, raising billions of dollars to expand its operations.
It seems as though the company is using its raised funds to incorporate futures and options on its trading platform. These derivative instruments will provide high leverage to traders. These instruments will derive its value from the underlying crypto assets such as Bitcoin, Ethereum and Cardano. Usually, only highly experienced traders use these products to maximize their profits from short-term trends and price volatility. The prices of derivative contracts move in an amplified way, thus being more profitable than spot trading. However, this feature also adds risk to trading.
How to trade derivatives?
There are two types of derivative contracts in the cryptocurrency space as of now: Futures and Options.
Options are further divided into call options and put options. If one expects a particular asset such as Bitcoin or Ethereum to move up in the short-term, the trader can buy call options by paying a premium. The value of the premium increases with an increase in price of the chosen asset, thus the buyer can sell the contract when the premium increases or choose to exercise the contract itself. However, if the trader expects the underlying asset to fall in the short-term, one can buy put options. The premiums of put options increase with a decrease in price of the concerned asset.
Trading in futures is always better than options because the premiums for options decay over time. Thus, the longer one holds options, one is likely to lose their investments. Most traders prefer trading in futures to protect their investments. However, trading in futures requires high capital. If one expects the price of an asset to rise, they can buy futures of that asset. However, they can sell futures of that asset if they expect a fall in the price in the short-term.