What needs to be considered when choosing a crypto derivatives exchange? What makes it different from the usual exchange that deals with the spot market?

There are two types of markets offered by popular crypto exchanges nowadays: spot and derivatives. The term "spot market" refers to the instantaneous exchange and settlement of financial crypto assets. It means that after a transaction is completed, the ownership of cryptocurrency is instantaneously transferred from sellers to buyers. When you go to an exchange to buy a cryptocurrency, you're engaging in the spot market because the transaction is instantaneous and you'll own the coins you bought right away.

Crypto Derivatives Exchange

Meanwhile, a derivative is a financial contract between two or more parties whose value is determined by an underlying asset, in this case, cryptocurrencies. It is a contract to purchase or sell a specific asset, such as stocks or cryptocurrency, at a fixed price and a predetermined period in the future. There are pros and cons in choosing derivative over the spot market, and if you're inclined to trade or at least try to learn how the market works, make sure to pick the best crypto derivatives exchange. Here's what you need to follow:

 

1. Make Sure It is Safe and Secure

Believe it or not, crypto exchanges is one of the biggest security weaknesses in the whole cryptocurrency system. There have been multiple cases where hackers managed to breach exchanges and stole clients' assets, resulting in the loss of millions of dollars instantly. So, it's incredibly important to make sure the exchange where you wish to invest has a good reputation and applies high security to protect clients' funds and data.

Your money, assets, and personal data are at risk if the required precautions are not in place. While each exchange has its unique security procedures, it is essential to set up numerous layers of security.

Be aware of exchanges with a history of shady dealings and exit frauds. Examine consumer feedback and complaints about the crypto derivatives exchange. Checking the terms and conditions of a platform is also crucial as it can get you to identify any unexpected terms that may be disadvantageous for you.

 

2. Consider the Fees

Making sure that you get reasonable fees is important. If you're an active trader, too high of a fee would lead to accumulative costs that make you spend extra funds. In crypto exchange, fees are usually divided between "taker" and "maker". For crypto exchanges, fees above 1% are considered costly. But some traders may tolerate them if the exchange is backed up with a good reputation and reliability.

See also: List of Crypto Exchanges with the Lowest Fees

 

3. Good UI and High-Performance Platforms

The most important aspects to consider in a crypto derivatives exchange is the user interface and functionality. It improves the accuracy and efficiency of user actions. User experience, on the other hand, is very subjective, with different personal preferences.

A good crypto exchange should also be able to meet high demands during large volume spikes. This is usually possible thanks to a high-performance matching engine that offers the infrastructure needed by the platform to quickly and efficiently roll out new order types and trading pairs, allowing the exchange to improve its overall service for all users. Therefore, an exchange with a high-quality matching engine can match demands even during periods of high volume and volatility.

 

4. Mind the Deposit and Withdrawal Policies

Exchanges vary depending on how cryptocurrency is purchased. Some exchanges may prefer bank transfers for deposits, while others may directly accept credit/debit cards. Those who are new to cryptocurrency futures trading should look for sites that accept fiat currency. It's also a good idea to keep an eye on the platform's transaction time. Some process transactions almost instantly, while others may take a few days.

While most exchanges do not have a minimum deposit requirement, they do impose limits on how much money a user needs to fund their account. The same goes for the withdrawal limit. If you think that the restrictions are too imposing or unsuitable for your transaction capacity, it's better to look for other exchanges that can suit your needs.

 

5. Margin and Leverage

Unlike spot trading, derivatives are typically provided with the ease of trading with margin and leverage. In fact, many traders choose to trade in the derivative market for this particular reason. Margin trading basically allows them to "borrow" money from the exchange so they can trade in a leveraged position. If you're familiar with forex and CFD trading, the terms margin and leverage should not sound so strange anymore.

For crypto derivative exchanges, margin can be offered from 30x to 100x or even higher. A 30x margin means you can open a position with a transaction size of 30 times your initial margin. This certainly opens new opportunities to get higher profits, but if you're not careful, you can close your positions with losses much quicker than expected.

 

Some Crypto Derivatives Exchanges to Consider

Considering the 5 points above, there may have been still some confusion as to where you can get started to look for the right crypto derivatives exchange. For a start, you can get through this list and see what it offers.

 

According to CryptoCoinTrade, among the many exchanges offering crypto derivatives products, BitMEX stands out as the largest platform with advanced features and specific tools that can be really useful for experienced traders. In addition, Binance and Kraken Futures are also worth mentioning for their simplicity in offering crypto derivatives; they might just be ideal for new traders who just start trading in the derivatives market.