Deribit: Everything to Know
By Beluga Research July 31, 2023
Summary
- Deribit is a cryptocurrency derivatives exchange known for its options and futures trading, offering advanced trading features for professional traders
- It was founded in 2016 by John Jansen and Sebastian Smyczýnski
- The platform provides a user-friendly interface, robust trading engine and a wide range of trading instruments
- Traders on Deribit benefit from high liquidity, advanced trading features and the ability to automate strategies with API and algorithmic trading support
Overview
Deribit is a cryptocurrency derivatives exchange known for its options and futures trading. It offers advanced trading features for professional traders.
It was established in 2016 by John Jansen, a former options trader, and Sebastian Smyczýnski, a developer. The platform aims to provide traders with a secure and efficient environment to trade cryptocurrency derivatives. Deribit's user-friendly interface, robust trading engine, and extensive range of trading instruments has attracted both retail and institutional traders.
A Brief History
Deribit launched in June 2016 and initially focused solely on bitcoin options trading. The platform quickly gained recognition within the crypto community for its innovative approach to derivatives trading. Over time, Deribit expanded its offering to include futures contracts and introduced options trading for other cryptocurrencies like ether.
In 2019 Deribit made a significant decision to relocate its operations from the Netherlands to Panama. This move was driven by regulatory concerns and the need for a more favorable legal framework. By migrating to Panama, Deribit aimed to provide its users with a stable and compliant trading environment.
What is Deribit?
Trading instruments. Deribit offers a wide range of trading instruments, including options and futures contracts. Options allow traders to speculate on the future price movement of an underlying asset, while futures contracts enable traders to buy or sell an asset at a predetermined price and date.
Leverage and margin. Deribit provides traders with the option to trade using leverage, allowing them to amplify their positions. Leverage enables traders to control a larger position with a smaller amount of capital. However, it is important to note that leverage also magnifies potential losses. Traders must carefully manage their risk and understand the concept of margin trading before utilizing leverage.
Security measures. Security is of paramount importance in the cryptocurrency space, and Deribit recognizes this. The platform implements robust security measures to safeguard user funds and personal information. These measures include cold storage for the majority of funds, two-factor authentication (2FA), and the use of multi-signature wallets.
Liquidity. Deribit boasts a high level of liquidity, which is crucial for efficient trading. Liquidity ensures that traders can easily enter and exit positions without significantly impacting the market price. The platform has attracted a substantial user base and actively engages with market makers to enhance liquidity on the exchange.
Trading interface. Deribit offers a user-friendly trading interface that caters to both novice and experienced traders. The platform provides advanced trading features such as order types (market, limit and stop), real-time market data, interactive charts and trading history. Traders can easily navigate the platform and execute trades efficiently.
API and algorithmic trading. Deribit supports API trading, allowing users to connect trading bots and algorithms to the platform. This feature enables traders to automate their trading strategies and execute trades programmatically. API trading is particularly beneficial for users who engage in high-frequency trading or require advanced order management capabilities.
Insurance fund. To protect traders from the risk of auto-deleveraging (ADL) and ensure the stability of the platform, Deribit maintains an insurance fund. This fund acts as a buffer and covers losses incurred by traders who are unable to fulfill their obligations. The Insurance Fund is funded by liquidation profits and serves as an additional layer of protection for traders.
Getting Started
To begin trading on Deribit, users are required to create an account and complete the necessary verification procedures. The registration process is straightforward and involves providing basic personal information. Once the account is created, users can deposit funds into Deribit wallets to start trading.
Deribit supports the trading of various cryptocurrencies, including bitcoin (BTC) and ether (ETH), as well as their respective options and futures contracts. The platform offers two types of accounts: A regular account and a testnet account. The testnet account allows users to practice trading without using real funds, making it an excellent option for beginners who want to familiarize themselves with the platform before diving into live trading.
Unique Aspects
One of the unique aspects of Deribit is its focus on options trading. Options are financial derivatives that provide traders with the right, but not the obligation, to buy or sell an asset at a predetermined price within a specific time period. Deribit offers both European-style and American-style options, giving traders flexibility in their trading strategies.
Deribit's options contracts are settled in bitcoin (BTC) and have various expiration dates and strike prices to choose from. This allows traders to tailor options positions to specific trading goals and risk appetites. The platform also provides advanced options trading features, such as the ability to trade spreads and combinations, which can be useful for implementing more sophisticated trading strategies.
In addition to options, Deribit also offers futures contracts. Futures contracts are agreements to buy or sell an asset at a predetermined price on a specified future date. Deribit's futures contracts are settled in bitcoin (BTC) and ether (ETH). By offering futures contracts, Deribit enables traders to speculate on the future price movements of these cryptocurrencies and hedge existing positions.
Deribit distinguishes itself from other cryptocurrency exchanges by providing a high level of liquidity for its options and futures markets. This liquidity is crucial for traders as it ensures they can enter and exit positions efficiently without experiencing significant slippage. Deribit achieves this by employing a market-making program and attracting a large number of professional market makers to its platform.
Another notable aspect of Deribit is its focus on security. The platform employs industry-standard security practices, including cold storage for the majority of user funds and two-factor authentication (2FA) to protect user accounts. Additionally, Deribit has established an insurance fund to cover any losses in the event of liquidations. This commitment to security has helped build trust among traders and investors using the platform.
Advantages
- Liquidity. Deribit boasts a high level of liquidity, which is crucial for traders looking to execute orders quickly and at favorable prices. The platform's large user base and market-making activities contribute to maintaining a deep order book, ensuring that buyers and sellers can match their orders efficiently.
- Leverage. The Deribit exchange allows traders to use leverage, which means they can trade with borrowed funds. By using leverage, traders can amplify potential profits, as they can control larger positions with a smaller amount of capital. However, it's important to note that leverage also magnifies potential losses, so it should be used with caution.
- Range of products. Deribit offers a wide range of cryptocurrency derivatives products, including futures and options contracts. This variety provides traders with flexibility in choosing the most suitable instrument for their trading strategies. Whether a trader wants to speculate on short-term price movements or hedge existing cryptocurrency positions, Deribit offers products that cater to different needs.
- Advanced trading features. Deribit provides advanced trading features that cater to both novice and experienced traders. The platform offers features such as stop-loss orders, trailing stops and post-only orders, which enable users to manage risk and execute more complex trading strategies. These tools can be particularly beneficial for traders who employ automated trading systems or want to implement specific risk management techniques.
- Security. Deribit places a strong emphasis on security to protect user funds and personal information. The platform employs industry-standard security measures, including cold storage for the majority of user funds, two-factor authentication (2FA) and encryption protocols for data transmission. Additionally, Deribit has implemented a robust insurance fund to cover potential losses in the event of liquidations or unexpected market conditions.
Disadvantages
- Regulatory uncertainty. The cryptocurrency industry, including derivative trading, is subject to evolving regulatory frameworks in different jurisdictions. This regulatory uncertainty can pose challenges for exchanges like Deribit, as compliance requirements may vary and could potentially impact the availability or accessibility of certain products or services in specific regions. Traders should stay informed about the regulatory landscape and consider the potential implications for their trading activities.
- Volatility risks. Cryptocurrencies are known for volatility, and derivative trading amplifies this risk. While volatility can present opportunities for profit, it also increases the likelihood of significant losses. Traders using derivatives on Deribit should be aware of inherent risks associated with volatile markets and consider employing risk management strategies, such as setting stop-loss orders or using appropriate position sizing techniques.
- Limited asset selection. Although Deribit offers derivatives contracts for several cryptocurrencies, the selection is still relatively limited compared to traditional financial markets. This limitation means that traders may not find derivatives products for certain less popular cryptocurrencies or niche assets. It's important for traders to assess whether the available assets on Deribit align with their trading preferences and strategies.
- Learning curve. Derivatives trading can be complex, especially for individuals who are new to the concept or have limited experience in financial markets. Traders using Deribit need to familiarize themselves with concepts such as margin trading, leverage and contract specifications. Additionally, understanding the dynamics of options contracts and their associated pricing models requires a certain level of knowledge and experience. Novice traders should invest time in learning these concepts before diving into derivative trading on Deribit.
- Technical risks. Like any online platform, Deribit is not immune to technical glitches or system outages. While the exchange has implemented measures to ensure system stability, unforeseen technical issues can still occur. Traders should be prepared for such situations and have contingency plans in place to manage their positions in case of unexpected downtime or connectivity issues.