Gaining exposure to Bitcoin is possible through multiple methods. One option comes in the form of derivatives, albeit these vehicles also have their own drawbacks. Researching the potential benefits and drawbacks is always paramount before making any financial commitments.
Negative Impact on Trading Profits
Experimenting with Bitcoin derivatives can be lucrative at first sight. However, when engaging with these vehicles – and especially futures contracts – there are certain limitations in place. When it comes to the price limit, most providers will cap the limit for profits to roughly 20% or slightly more. That may seem appropriate at first glance, but it really isn’t sufficient. Bitcoin’s price can appreciate by a lot more than this fixed percentile in the allotted time span.
Limiting oneself to lower profits is never the answer. More specifically, it may be sufficient for those who are fairly risk-averse, but they shouldn’t necessarily get involved with Bitcoin in the first place. Any provider deliberately cutting into traders’ profits is best left avoided. Unfortunately, this approach is fairly common among derivatives providers in the cryptocurrency space.
Creating More Market Pressure
If the Bitcoin market turns bearish, the impact of derivatives should not be underestimated. More specifically, it will prove beneficial to those who already bet against Bitcoin at the time. However, the influence of derivatives can also prolong the bearish trend Bitcoin is going through at the time. Combined with the price limits mentioned above, it is a cascading effect that cannot be underestimated.
In practicality, it is possible to have multiple futures traders sell their derivatives contract at the same time. The end result is an entire market crash, with prices potentially going much lower than their value on centralized exchanges. Such an impact on the market can occur even when you, as an individual trader, are not feeding the bearish frenzy. However, it will still have an impact on your position and portfolio.
Instability of Providers
In theory, there are many different ways to obtain Bitcoin derivatives on the market. At the same time, there are a lot of providers that are not necessarily the most stable option to explore. This is especially true when the provider also acts as a regular Bitcoin exchange. Considering the vast number of unregulated trading platforms, there is a significant risk of having markets manipulated in the process.
Moreover, there are the potential exchange outages to take into account. Albeit these incidents have become less prominent in recent years, it is still a very real problem where derivatives are concerned. If a Bitcoin price swing were to coincide with a service provider facing an outage, things can go from bad to worse very quickly.
Severe Risk Appetite is Required
Perhaps the biggest drawback to using Bitcoin derivatives is how it requires a severe appetite for overall portfolio risk. More specifically, the long-term game is what everyone should be looking at at all times. At the same time, there will be short-term fluctuations capable of incurring significant short-term portfolio losses.
Especially for newcomers, this can be rather upsetting. Seeing the balance of one’s portfolio go up and down wildly without any real course of action is rather problematic. Those with no risk for appetite will not feel too comfortable with Bitcoin derivatives, for obvious reasons. After all, these contracts have a specific duration that needs to be honored. When one owns actual bitcoin, it can always be sold when one feels uneasy.