A derivative is a financial contract whose value is derived from, or linked to, an underlying asset. In crypto, the underlying asset is typically a cryptocurrency like Bitcoin or Ethereum, or sometimes a basket of assets or an index. Instead of buying and holding the coins themselves, traders and institutions use derivatives to gain price exposure through an agreement that references the asset’s value.
How derivatives work in crypto
Crypto derivatives are agreements between two parties that settle based on what happens to the underlying asset’s price. The contract can be settled by delivering the asset, but in many crypto markets it is cash-settled, meaning profits and losses are paid in a currency like USD or a stablecoin without transferring the coins. This structure is useful for participants who want exposure while avoiding custody, on-chain transfers, or other operational complexity.
Common crypto derivative types and uses
Futures and perpetual futures are among the most widely used crypto derivatives. A futures contract sets terms to buy or sell an asset at a later date, while a perpetual future is designed to track spot prices without an expiry, often using a periodic funding mechanism. Options are another major category, giving the buyer the right, but not the obligation, to buy or sell at a specified price before a certain date.
In practice, a miner might use futures to lock in expected revenue by hedging against a potential price decline, while an active trader might use perpetuals to take a short position during a downturn without borrowing the asset. Options can be used to hedge downside risk while keeping upside exposure.