A derivative is a financial contract between two or more parties that derives its value from an underlying asset ie. stocks, commodities or cryptocurrencies. An agreement to buy or sell a particular asset at a predetermined price and a specified time in the future. Derivatives do not have inherent or direct value by themselves; the value of a derivative contract is purely based on the expected future price movements of the underlying asset.
Cryptocurrency tokens are a special kind of virtual currency tokens. They reside on their own blockchains and represent an asset or utility. Tokenizing assets via Blockchain is maturing and explained here (Security Token Offering), here (Commodities) and here (CRE).
Adoption is happening daily - (JP Morgan Coin). And so are derivative markets with physical delivery that can actually reduce volatility in the price of Bitcoin, which was the original intention of derivative markets in the 18th century.
The main forms of derivatives are:
- Swaps: A swap is an arrangement between 2 parties to exchange a series of cash flows in the future. They are usually based on interest-bearing instruments such as loans, bonds or notes as the underlying asset. The most common form of swaps are interest swaps, which involves the exchange of a future stream of fixed interest rate payments for a stream of floating rate payments between 2 different counter-parties.
- Futures: A financial contract where a buyer has an obligation for a buyer to purchase an asset or a seller to sell an asset at a fixed price and a predetermined future price.
- Options: A financial contract where a buyer has the right (not an obligation) to purchase an asset or a seller to sell an asset at a predetermined price by a specific timeline.
Keep in mind crypto-derivatives represent a second layer of speculation on top of an already volatile crypto-asset. Since one of the main factors that drive the price of cryptocurrencies are news and market speculation, hence no easy way to predict any of those. Also, traditional market trading/ investing strategies may not be applicable as outlined here. If we add a mathematical model (derivatives) on top of that, we are essentially adding a speculative vehicle on top of a volatile vehicle.
Exchanges for crypto-derivatives Huobi, Bitmex, CBOE, Bitozz, UDAX and others.
Are Security Tokens a Derivative?
In general, any form of security token can be considered a derivative in-and-out itself as derives its value from the performance of an underlying asset. However, traditional derivative models include other aspects such as time constraints, obligation symmetry or settlement model that don’t quite fit the profile of security tokens. Therefore, security tokens can behave like derivatives while others trade more like first-tier asset classes.
Type and Models of Security Token Derivatives
As the security tokens market evolves, there are several derivative products that are likely to surface.
- Derivatives that Represent Security Tokens
- Security Tokens that Represent Market Derivatives
- Forward-Futures Model
- ETF Model
- Swap Model
- Mutual-Fund Model
Derivative markets foremost value will be the implied risk information that can help investors make allocation decisions.
Looking for an STO Consultant?
Moonwhale Blockchain Ventures Inc. position ourselves to provide STO solutions, helping businesses with our STO Financing service. Based in the USA, Moonwhale will assist you as STO advisors in One-Stop-Shop solution for your security token offering:
- Token Economics
- Token Creation & Issuances
- Marketing Materials
- Private Sale Fund Raising
- Public Sale Fundraising
- Secondary Market Trading
Please feel free to contact us.
About The Author:
Danny Christ is the CEO & Co-Founder of Moonwhale Blockchain Ventures Inc.
Based in Kuala Lumpur, Danny has over 20 years of IT, Operations and Supply Chain experience across Germany (home), US, Singapore, Indonesia, Thailand, Malaysia, Vietnam, and the Philippines. He managed IT projects (ERP, CRM, POS, BI) and regional expansion (franchise, M&A) for various SMEs in the Consumer Industry. His career rose to Vice President of a 3500 employees organization.