A Complete Guide to Cryptocurrency Trading for Beginners {Chapter two}

Financial Markets and Trading Instruments

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What is a financial instrument?
In simple terms, a financial instrument is a trad-able asset. Examples include cash, valuable metals (like gold or silver), a document that confirms possession of something (like a business or a resource), a right to deliver or receive cash, and many others. Financial instruments can be really complex, however the fundamental idea is that whatever they are or whatever they represent, they can be traded.

Financial instruments have various types primarily based on different classification methods. One of the classifications is based totally on whether or not they are money instruments or derivative instruments. As the name would suggest, derivative instruments derive their value from something else (like a cryptocurrency). Financial instruments may additionally be labeled as debt-based or equity-based.

But where do cryptocurrencies fall?
We should think of them in multiple ways, and they should fit into more than one category. The easiest classification is that they are digital assets. However, the potential of cryptocurrencies lies in constructing an entirely new financial and economic system.
In this sense, cryptocurrencies form a absolutely new category of digital assets. What’s more, as the ecosystem evolves, many new categories may additionally be established that wouldn’t in any other case be possible. Early examples of this can already be viewed in the Decentralized Finance (DeFi) space.

What is the spot market?
The spot market is where financial instruments are traded for what’s known as “immediate delivery”. Delivery, in this context, simply means changing the financial instrument for cash. This may also seem like an unnecessary distinction, but some markets aren’t settled in cash instantly.

In simple terms, you should think of a spot market as the place where trades are made “on the spot.” Since the trades are settled immediately, the current market fee of an asset is regularly referred to as the spot price.
So, what does this mean in the context of cryptocurrency markets? What can you do on the Binance spot market? You can change cash with each other. So, if you choose to alternate your BNB to BUSD, you go to the BNB/BUSD spot market, and voilá! In the same way, if you’d like to exchange your BNB to BTC, you’d go to the BNB/BTC spot market. Once your orders are filled, your coins will be swapped instantly. This is one of the best approaches of trading cryptocurrencies.

What is margin trading?
Margin trading is a method of buying and selling using borrowed money from a third party. In effect, trading on margin amplifies results – both to the upside and the downside. A margin account gives merchants more access to capital and eliminates some counter party risk. How so? Well, merchants can exchange the same position size however maintain much less capital on the cryptocurrency exchange.
When it comes to margin trading, you’ll frequently hear the terms margin and leverage. Margin refers to the amount of capital you commit (i.e., put up from your personal pocket). Leverage means the amount that you amplify your margin with. So, if you use 2x leverage, it means that you open a position that’s double the amount of your margin. If you use 4x leverage, you open a function that’s 4 times the price of your margin, and so on.
However, be conscious of liquidation. The higher leverage you use, the closer the liquidation price is to your entry. If you get liquidated, you’ll risk losing your whole margin. So, be very conscious of the excessive dangers of trading on margin before getting started. The Binance Margin Trading Guide is an essential useful resource before you get started.

Margin trading is extensively used in stock, commodity, and Forex trading, as well as the Bitcoin and cryptocurrency markets. In a more traditional setting, the funds borrowed are furnished by an investment broker. When it comes to cryptocurrencies, the funds are usually lent by the exchange in return for a funding fee. In some other cases, however, the borrowed money may also come directly from different merchants on the platform. This will normally incur a variable interest rate (funding fee), as the rate is determined by using an open marketplace.
So, we’ve temporarily defined what margin trading is, however there’s usually more to learn.

What is the derivatives market?
Derivatives are financial assets that base their value on some thing else. This can be an underlying asset or basket of assets. The most frequent kinds are stocks, bonds, commodities, market indexes, or cryptocurrencies.
The derivative product itself is essentially a contract between more than one parties. It receives its price from the underlying asset that’s used as the benchmark. Whatever asset is used as this reference point, the core idea is that the derivative product derives its value from it. Some frequent examples of derivatives merchandise are futures contracts, options contracts, and swaps.

According to some estimates, the derivatives market is one of the largest markets out there. How so? Well, derivatives can exist for virtually any financial product – even derivatives themselves. Yes, derivatives can be created from derivatives. And then, derivatives can be created from these derivatives, and so on. Does this sound like a shaky house of cards ready to come crashing down? Well, this may also not be so far from the truth. Some argue that the derivatives market performed a major part in the 2008 Financial Crisis.

What are forward and futures contracts?
A futures contract is a type of derivatives product that permits traders to speculate on the future price of an asset. It entails an agreement between parties to settle the transaction at a later date known as the expiry date. As we’ve mentioned with derivatives, the underlying asset for a contract like this can be any asset. Common examples encompass cryptocurrency, commodities, stocks, and bonds.
The expiration date of a futures contract is the last day that trading activity is ongoing for that unique contract. At the end of that day, the contract expires to the last traded price. The settlement of the contract is decided beforehand, and it can be either cash-settled or physically-delivered.
When it’s delivered physically, the underlying asset of the contract is directly exchanged. For example, barrels of oil are delivered. When it’s settled in cash, the underlying asset isn’t exchanged directly, only the fee that it represents (in the form of cash or cryptocurrency).
If you’d like to trade futures on Binance, make sure to check out The Ultimate Guide to Trading on Binance Futures.

What are perpetual futures contracts?
Futures products are a magnificent way for traders to speculate on the price of an asset. However, what if they want to remain in their position even after the expiry date?

The main difference between them and a regular futures contract is that they never expire. This way, traders can speculate on the price of the underlying asset besides having to worry about expiration.
However, this provides a hassle of its own. What if the price of the perpetual futures contract gets really far from the price of the underlying asset? Since there’s no expiry date, the perpetual futures market should have a significant, persistent disparity with the spot market.

This is why perpetual futures contracts implement a funding fee that’s paid between traders. Let’s think about that the perpetual futures market is trading better than the spot market. In this case, the funding rate will be positive, that means that long positions (buyers) pay the funding prices to short positions (sellers). This encourages buyers to sell, which then causes the rate of the contract to drop, transferring it closer to the spot price. Conversely, if the perpetual futures market is trading lower than the spot market, the funding rate will be negative. This time, shorts pay longs to incentivize pushing up the price of the contract.
To summarize, if funding is positive, longs pay shorts. If funding is negative, shorts pay longs.

Perpetual futures contracts are hugely popular amongst Bitcoin and cryptocurrency traders. If you’d like to examine more about perpetual futures contracts, take a look at out What Are Perpetual Futures Contracts?.

What are options contracts?
An options contract is a kind of derivatives product that offers merchants the right, but not the obligation, to purchase or sell an asset in the future at a specific price. The most important distinction between a futures contract and an options contract is that merchants are not obligated to settle options contracts.

When traders purchase an options contract, they speculate on the price going in a direction.

There are two types of options contracts: call options and put options. A call option bets on the rate going up, whilst a put option bets on the rate going down.
As with other derivatives products, options contracts can be primarily based on a wide range of financial assets: market indexes, commodities, stocks, cryptocurrencies, and so on.
Options contracts can allow quite complex trading techniques and risk management methods, such as hedging. In the context of cryptocurrencies, options may be the most beneficial for miners who prefer to hedge their large cryptocurrency holdings. This way, they’re better protected against events that ought to have a hazardous impact on their funds.

What is the foreign exchange (Forex) market?
The foreign exchange (Forex, FX) market is the place traders can exchange one country’s currency into another. In essence, the Forex market is what determines the exchange rates for currencies round the world.
We may regularly think of currencies as “safe haven” assets. Even the term “stablecoin” must imply, in theory, that the asset is somehow protected from volatility. However, whilst this is true to some extent, currencies can also experience tremendous market fluctuations. How come? Well, the value of currencies is additionally determined by supply and demand. In addition, they may additionally be influenced by inflation or other market forces associated to global trade and investment, and geopolitical factors.

How does the Forex market work? Well, currency pairs might also be traded by investment banks, central banks, commercial companies, investment firms, hedge funds, and retail Forex traders. The Forex market additionally permits global currency conversions for international trade settlements.
Forex traders will typically use day trading strategies, such as scalping with leverage, to make bigger their returns. We’ll cover how exactly that works later in this article.

The Forex market is one of the most important building blocks of the current global economy as we know it. In fact, the Forex market is the biggest and most liquid financial market in the world.

What are leveraged tokens?
Leveraged tokens are tradable assets that can provide you leveraged exposure to the price of a cryptocurrency without the typical requirements of managing a leaveraged position. This means you don’t have to worry about margin, collateral, funding, and liquidation.
Leveraged tokens are an innovative financial product that only exist thanks to the power of blockchain. Leveraged tokens were at the beginning introduced through derivatives exchange FTX, however since then have seen various alternative implementations. The main idea behind them, however, is nevertheless the same – tokenizing open leveraged positions. What does this mean?
Leveraged tokens represent open perpetual futures positions in a tokenized form. Remember when we mentioned how derivatives can be created from derivatives? Leveraged tokens are a high instance since they derive their value from futures positions, which are additionally derivatives.
Leveraged tokens are a outstanding way to get a simple leveraged exposure to a cryptocurrency.