What is Deribit?

Deribit is a major unregulated cryptocurrency derivatives exchange that launched in 2016. Derivatives are financial instruments that represent a trade on some underlying asset, in this case cryptocurrencies. The most popular derivatives offered on Deribit are Bitcoin options, and Deribit is the largest Bitcoin options exchange in the business.

Traders often play with a lot of leverage, meaning they borrow money to increase the size of potential profits while risking greater losses. Like other cryptocurrency exchanges, Deribit operates 24 hours a day, 7 days a week.

Deribit was launched in June, 2016, by Dutch trader John Jansen, who’d heard about Bitcoin in 2012, and, immediately hooked, decided to create his own derivatives trading platform in 2014.

Deribit is a crypto-native exchange, meaning it doesn’t allow deposits of fiat currencies, like the US dollar, euro, or rupee. It says it will add these when it’s allowed, although this is unlikely to be any time soon; regulators have cracked down on unregistered derivatives exchanges or banned them outright, judging them as illegal.

Deribit says it keeps more than 99% of its customer deposits in cold storage, stored in vaults with multiple bank safes. Cold storage refers to offline cryptocurrency wallets; often no larger than a USB drive, these wallets can’t be hacked by conventional means because all the operations that require private keys, the equivalent of a wallet’s passwords, are kept offline.

Deribit uses a software solution from blockchain analytics and investigation firm Chainalysis to monitor for money laundering and sanctioned addresses. It also screens customers against a global database of sanctions and watchlists.

How big is Deribit?

Deribit is by far the largest options exchange. On August 16, 2021, Deribit processed $457 million of Bitcoin options contracts. OKEx came next with $11 million.

But it is far from the largest Bitcoin futures exchange. As of this writing, August 17, 2021, Deribit processed the 8th largest number of Bitcoin futures trades in terms of dollar value.

What are Bitcoin options and Bitcoin futures?

Options and futures are types of derivatives contracts, and the most popular type of derivatives on offer in the cryptocurrency market. Derivatives, as previously mentioned, are investment vehicles that trade on some underlying asset. Both of these contracts represent promises to fulfil orders for Bitcoin at some time in the future.

Bitcoin futures let you buy some Bitcoin today with the view to receive it at some predetermined point in the future. The idea is that you agree the price today and then receive that Bitcoin in the future, no matter the price of the Bitcoin when the contract expires. Futures contract prices are a little bit different from the price of Bitcoin, because they represent an expectation of how much Bitcoin will be worth at a certain point in the future, rather than how much it is worth today (which does take into account its future potential but more accurately reflects how much it is worth today).

There are two common reasons why you would buy futures.

The first is as a hedge. Outside of crypto, hedges are popular among crop farmers, who use futures contracts to guarantee a price for their crop that withstands market fluctuations caused by, say, overproduction. Bitcoin futures are used as a hedge by those who need to, for instance, repay loans in Bitcoin and want to ensure they can receive that Bitcoin at today’s price.

The other reason is pure speculation—this is one reason the derivatives market is often likened to gambling. If the price of Bitcoin rises above the price of the futures contract (and any fees therein), you’ll have made a profit by, essentially, buying discounted Bitcoin. Since Bitcoin futures are inherently leveraged trades—you don’t need to put up an awful lot of capital to buy a futures contract, they can be immensely lucrative (or ruinous if the market moves against you).

Bitcoin options are Bitcoin futures with a get-out clause. Just like futures, you can use them for hedging or for speculation. But with Bitcoin futures, you have to buy that Bitcoin when the contract expires (or matures—ends, essentially), whether it’s a good deal or not. Options, by contrast, give you the right, but not the obligation, to buy Bitcoin when the contract expires. They are slightly less risky because you don’t actually have to buy the Bitcoin; you only risk the price you paid to buy the contract, known as the “premium.”

Options on Deribit are “European” or “Vanilla” style, which means you can only exercise them at the expiration date of the options contract, just like futures. This is in contrast to “American” style options, which allow you to exercise your right to buy or sell at any time before the expiration date. The minimum order size for an options contract on Deribit is 0.1 Bitcoin or 1 Ethereum.

Deribit offers a third kind of futures product, known as “perpetual” futures. Other exchanges, most prominently Binance and BitMex, also offer these contracts. These are futures contracts with no expiration date, and can thus be held indefinitely without having to extend the length of the contract. They fulfil the same purpose as another type of derivatives contract, contracts for difference (CFDs), which also let traders indefinitely hold a derivatives contract.

Perpetual futures contracts were proposed by economist Robert Shiller in 1992 but only became a thing in crypto, which found in perpetual futures a way to jumpstart derivatives contracts in a market full of unregulated (and thus potentially untrustworthy) counterparties. In 2016, BitMEX became the first exchange to offer them.

How do you trade Bitcoin derivatives on Deribit?

To trade Bitcoin derivatives contracts on Deribit, you first need to set up an account. To do this as a retail trader, you’ll have to submit a form of ID and proof of residence. Canadians in Ontario aren’t allowed to apply, nor are citizens from the United States, Japan, and a handful of other countries.

Once you’ve created an account, you’ll need to fund it with Bitcoin. You can do this by buying Bitcoin at a cryptocurrency exchange and sending the money to your Deribit address.

To buy futures contracts, you can click on a perpetual future, which has no expiration date, or pick a futures contract that ends at some predetermined point in the future, such as next week, at the end of the year or next year. You can trade with up to 100x leverage, which means that you can play with 100x as much money you have. This is very risky. Although profits can be 100x as big, you are also 100x more sensitive to losses and your position could be closed at any point unless you post a lot of money. If that happens, you could lose a lot.

To buy Bitcoin options, you click on an option in the BTC options page—any price in the table that strikes your fancy—and you can add your order. “Call“ options give you the right to buy the Bitcoin and ”put“ options give you the right to sell it. On Deribit, Bitcoin options are exercised automatically if they expire “in the money”—in other words, if you stand to make a profit when the contract expires, Deribit will automatically buy that Bitcoin on your behalf. All settlements are paid in Bitcoin. The same rules apply for Ethereum.

Why are derivatives trades so risky?

Options and futures contracts are incredibly risky and complicated, and usually reserved for experienced financiers. Although cryptocurrency trading platforms, as well as commission-free stock trading apps such as Robinhood, made them available to the public at a low cost, that doesn’t mean they’re safe. Trading on 100x leverage is incredibly risky, as even the smallest movement in the market could push you out of your position. If the common advice is to “never invest more than you can afford to lose,” trading on 100x leverage would require an alteration of “never invest 100x less than you can afford to lose,” since it gives you a great deal—some would say an inordinate amount—of buying power.