What Are Derivatives?
Derivatives are contracts that reference some other asset (the underlying) rather than exchanging that asset itself. In crypto the most common are futures, perpetual futures, and options. The contract's P&L comes from the underlying's price, a rate, or an index, according to the contract specs.
How Crypto Derivatives Work
A dated future converges toward spot as expiry approaches. A perpetual has no expiry and uses a funding rate to keep the contract near the index. Options give a right, not an obligation, in exchange for a premium. Venues may quote linear (stablecoin-margined) or inverse (coin-margined) contracts, and they use a mark price for margin and liquidation.
Open interest measures outstanding contract size. It is one way to see whether leverage is building or coming off.
Why It Matters for Traders
Most liquid crypto trading is in derivatives, especially perps. They let you go short, use leverage, and hedge a spot book, but they add funding, liquidation, and basis risk that spot does not have. Reading derivatives context (funding, open interest, liquidations) is part of understanding the market around a trade.
How Perps Traders Use This
Know the contract you are actually in: margin asset, mark, funding interval, and maintenance rate. Use derivatives data as context for the journal: a fill next to crowded funding is a different trade from the same fill in a quiet book.
Common Mistakes
- Treating a perp as if it were spot and ignoring funding over the hold.
- Mixing coin-margined and stablecoin-margined P&L in the same mental math.
- Reading open interest or funding as a stand-alone signal without price and liquidity.
