What are Linear Derivatives

Updated: Nov 29, 2019

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In the complicated world of trading, many different terms and products exist. Derivatives are one classification of products worth understanding if you are in the crypto space, considering the influx of derivatives products the market has seen over the past several years.


At its most basic level, a derivative is a trading product based on the price activity of an underlying asset. Derivatives let you speculate on the price of an asset without actually needing to buy the underlying asset.


Derivative products exist for Bitcoin (BTC), for example, allowing traders to speculate on Bitcoin’s price going up, down, or sideways. without them needing to buy the actual asset.


The actual underlying asset is Bitcoin itself in this case. This is physical Bitcoin, also called spot Bitcoin, that parties can buy, sell, mine, and transfer to various wallets or exchanges.


Derivatives are trading products hosted on exchanges, although instead of trading spot BTC, you are trading contracts. One a basic level these contracts hold the ability to settle trades, paying you out based on profit or loss at some point in the future.


Futures and options are two examples of common derivative trading products, which can be classified as linear or non-linear.


Options - Non-Linear

Options trading is an agreement to buy or sell an asset at a future date for a predetermined price.


There are numerous ways you can trade options and see profit or loss on those trades, even if the options’ underlying assets do not go up or down. For this reason, options are classified as non-linear - because your profit or loss does not depend linearly on the underlying asset’s price. Options have a number of factors affecting the contract price. These factors are also known as option’s greek.


Essentially, there are ways to profit in options trading without the underlying asset going up or down.


Futures - Linear

Bitcoin futures trading on BTSE, however, is an example of a linear derivative product. Bitcoin futures trading involves speculating on Bitcoin’s future price via buying and selling contracts.


Each Bitcoin futures contract on BTSE is pegged to the price of 0.001 BTC, so going long 1,000 contracts means you believe Bitcoin’s price will rise in the future (if you expect to profit). The notional exposure of 1,000 contracts is equivalent to one Bitcoin.


BTSE Bitcoin futures track the price of spot Bitcoin and you see profit or loss, depending on your position, if BTC goes up or down. Unlike options, futures trading linearly tracks the price of the underlying (spot) asset, leading to profit or loss if the spot asset goes up or down.


A New Type of “Quanto Futures”

BTSE offers a new type of Quanto futures capabilities. Traditional Quanto futures allow you to trade in one currency pricing while settling in another currency at a fixed exchange rate. Meaning a cross-currency, cash-settled futures contract which has an underlying denominated in one currency (say, a foreign currency) and is settled in another currency (say, the domestic currency) at a fixed exchange rate. BTSE offers all of that except the fixed exchange rate part. You can transfer different currencies or assets, such as BTC, into your futures trading wallets, and use those currencies or assets as collateral.


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Example

Let’s say you want to trade USDt perpetual futures while putting USDt into a trade. You then transfer 1 USDt into your USDt perpetual futures wallet.

When you go to make a trade, your wallet balance shows 1 USDt. You then enter a 1,000 contract long position. While in the position, your entries, exits, and other data show USDt movement relative to USD, but when you close that position, you can settle in BTC, ETH or other currencies, paying you out based on your PnL for that trade.


In general for each trade:


You put currency A into a trade. (In the above example, currency A is USDt.)

You close your position and receive currency B back, which is converted at a prevailing market price. (Regarding the example, you receive BTC, ETH or other currencies back in your wallet, based on your position’s PnL.) ___________________

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