Cryptocurrency has made a huge uproar all around the globe. Last year the total market capitalization of cryptocurrency reached 3 trillion, and in the upcoming years, as the governments have also started taking participation in this industry and blockchain technology, the Web3 is the probable future. Not only cryptocurrency but the affiliated products such as NFT, DeFi, ETF all of them are thriving in this current market. Even corporate industries are actively investing and buying cryptocurrencies. Music and gaming companies are collaborating with blockchain companies in order to innovate and create new ways to bring business.
But cryptocurrency itself is not just a simple concept, and these are multiple terms and technologies that have been associated with it as blockchain technology has been developing year after year. Now we are here to learn about crypto futures and options, the difference between them and trading futures vs options, which means what you need to choose and why should you choose it?
But before that, let us introduce ourselves with the term future vs option.
About futures and options
The term futures and options have equal popularity in the financial industry and have also made their mark in the crypto industry. To put it in layman’s terms, there are popular derivative contracts and, in this case, crypto derivatives contracts. These financial tools obtain their values from an underlying asset. While at a glance, both these crypto-financial tools may feel similar because of their nature to allow their holder to trade their security or asset at a later date, they are also equally distinct in their nature. To know more about futures vs options, let us look at their definitions and examples.
Difference between futures vs options with examples
In the option contract, the underlying asset or security or asset already has a predetermined price, and the contract holder has the right to trade the asset, but it is not an obligation. On the other hand, future contracts require a specific date when the contract holder has an obligation to trade the underlying security or asset at a pre-agreed price, and this contract cannot be undone, meaning the contract holder has to complete the trade. To enhance our understanding of these crypto-financial tools, let us look at some examples below:
Futures
Suppose an industrialist requires aluminium for his factory, and he contacts an aluminium dealer for that. Now that industrialist can opt for a futures contract where the dealer will have to sell him aluminium at a rate of 2 USDT per kilogram when the year ends. But in this contract, both the parties are obliged to complete their deal according to the contract.
Options
Suppose William wants to buy Henry’s Lamborghini using 3 bitcoins (BTC), but he is unsure at the very moment. Now William can opt for an options contract with Henry where William will have the right (but not obligation) to purchase Henry’s Lamborghini using the same 3 bitcoins at any time within 6 months, according to the contract.
Crypto futures vs options trading: which one to go for?
In the recent crypto market, both of the crypto-financial tools have gained enough popularity because of their unique set of advantages. Financial contracts like options can be less risky for investors, but futures contracts are more cost-effective. It is also very much dependent upon the individual investors based on their risk appetite, preference of liquidity, etc., but if you use a better crypto exchange, you won’t be restricted by the choices.
Choosing between crypto futures vs options can be tricky, given that both have their own advantages and disadvantages, but an investor should not limit himself or herself just by looking at one option. A good investor always knows about the current marketplace and is knowledgeable enough to opt for whatever is necessary at the moment. So always do your research and choose wisely before investing.