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We often listen to the terms called Crypto derivatives especially Bitcoin derivatives. It shares a huge market with major exchanges like Binance, OKEX, Huobi, and offers derivative service. But what are these derivatives? Are they different from the traditional crypto trading?
Let us dig in more to know.
Crypto Derivatives- Good or Bad?
Derivatives are basically, a financial contract between the two parties based on the future price of an asset. In simple words, Crypto derivatives is an agreement to buy or sell a specific cryptocurrency at a predetermined price, in a specific time in the future.
In the crypto space, they are mostly offered against the number one asset Bitcoin. Therefore the price of the derivative completely depends on its underlying asset which is Bitcoin in many cases.
FCA Bans Crypto-Derivatives and all its Products
As the derivative market is depending on the speculation of the price of the asset in the future, it carries a high risk for the investors. The price of the asset may rise and fall at a greater speed which could amplify profits or loss too.
Therefore, the FInancial Conduct Authority(FCA) of the UK considering the possible harm for the customer’s funds published final rules and banned the derivative trading. The reasons mentioned by the FCA for the ban are,
- Price valuation is completely based on speculation, hence cannot be reliable.
- The future trading might give scope for financial theft or cybercrime.
- The crypto assets price cannot be predicted as they are highly volatile.
- Lack of knowledge about the crypto assets and the investment options among the retail customers
Sheldon Mills, interim Executive Director of Strategy & Competition at the FCA said,
“This ban reflects how seriously we view the potential harm to retail consumers in these products. Consumer protection is paramount here,”
The FCA has estimated the retail consumers can save 53million pound from the ban which will come into effect on 6 January 2021.
Ban on Crypto Derivative-Good move or a Set Back?
As mentioned before, derivative trading involves the agreement between two parties based on the future price, only the short term traders prefer to derivative trading. However, the traders might end up earning more profits or loss depending on the price of the asset.
Therefore, the short term traders might get affected by the move as they believe in making huge profits in a short time. Where-as the long term investors will not be affected as they do not believe in the derivative trading.
On the Whole, it is very hard to say whether crypto derivatives are good or bad as they depend on the type of traders you are. The swelling derivative market might have raised concern as recently in September 2020, the volumes rose to the record highs of $712 billion nearly 58 percent in just a month.
Therefore to safeguard the user’s interest FCA banned crypto derivatives trading. It also mentioned that customers who have already invested can continue to hold or withdraw as per their choice without any time limits.