Crypto Derivatives 101 for Risk Teams: Futures, Options, and Perpetuals

Understanding Crypto Derivatives for Risk Teams

Crypto derivative trading now accounts for the majority of daily volume and price movements.

In late 2025, for example, centralized-exchange derivatives volume was $5.98 trillion versus $2.14 trillion for spot (about 2.8 times), per CoinDesk Data’s Exchange Review.

As institutional investors grow their exposure to digital assets, a strong understanding of crypto derivatives is essential for risk teams. Additionally, compliance teams must seek crypto derivative exchanges that adhere to qualified custody and other domestic and international regulatory standards.

Key Takeaways

• Crypto derivatives allow institutions to hedge risk, manage volatility, trade on margin, and gain synthetic exposure to digital assets without holding them directly on their balance sheets.

• Futures, options, and perpetuals mirror traditional financial mechanisms but trade 24/7 on crypto derivative exchanges.

• Institutional adoption relies on clear risk frameworks. Qualified custodians and transparent counterparties turn speculative investments into managed exposure.

• BitGo helps institutions access the crypto derivatives market securely through qualified and insured custody solutions, deep liquidity support, and regulation-compliant infrastructure.

What Are Derivatives in Crypto?

Derivatives are financial contracts whose value is derived from underlying assets, such as stocks, commodities, or digital currencies. They let institutions gain exposure to price movements without holding the underlying assets directly. 

Crypto derivatives function similarly to traditional financial instruments but operate continuously in global, 24/7 crypto markets. 

Examples of crypto derivatives include futures, options, and perpetual futures.

How They Work

Derivatives let traders speculate on the future price of an underlying asset, with bulls and bears winning and losing based on how much prices move relative to their predictions. 

Each type of derivative functions differently, but the typical mechanics are as follows: 

1. Contract Creation: Two parties agree on a buy or sell price. They adhere to their agreement, regardless of what the actual future price may be. 

2. Margin and Leverage: Traders post collateral (often in cash, stablecoins, or Bitcoin) and, often (but not always), open leveraged positions. This allows them to trade larger positions than they could with their collateral alone, amplifying both profit and loss potential. 

3. Price Movement: As the asset price fluctuates, one party profits while the other incurs a loss, based on contract terms. For example, if a trader buys a futures contract for Bitcoin at $95,000 and the price rises to $105,000, they profit from the difference.

4. Settlement: When the agreed-upon date arrives, contracts are settled with either cryptocurrency or fiat, depending on exchange and contract rules. 

Crypto derivatives typically trade on specialized crypto derivative exchanges, which provide liquidity and securely facilitate transactions on their behalf. 

Why Institutions Use Crypto Derivatives

Institutions turn to crypto derivatives to hedge risk, manage portfolio volatility, and trade on margin. Derivatives help risk teams maintain balance sheet control, diversify portfolios, and achieve exposure to nontraditional asset classes. 

Additionally, institutions trade derivatives because they often prefer not to directly hold large volumes of crypto; doing so introduces operational, compliance, and custodial risks, such as:

• Potential loss or theft of keys

• Regulatory complexity 

• The need for internal wallet security infrastructure and insurance coverage

Advantages and Disadvantages

Crypto derivatives enable 24/7 global market trading, providing access to considerable amounts of margin and the ability to hedge positions against crypto, fiat, and traditional asset volatility.

However, disadvantages include counterparty risk (especially when trading on platforms that don’t adhere to qualified custody standards), amplified loss potential when using leverage, and regulatory uncertainty. 

While derivatives certainly allow for profitable trading strategies, institutions must weigh trade-offs against risk management and compliance frameworks.

Types of Crypto Derivatives

Each derivative offers a unique risk and reward profile. Futures enable linear exposure, options provide asymmetric payoff structures, and perpetual futures allow indefinite hedging without the need to renew contracts as expiration dates approach.

Let’s examine each briefly. 

Crypto Options

Options grant the holder the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before an expiration date. Option writers are obligated to fulfill a contract if and when the buyer chooses to exercise. 

Purchasing the right to buy an underlying asset is known as a “call,” while the right to sell is known as a “put.” 

• Option Holder: The buyer of a contract, who pays a fee (the premium) for the right to exercise a contract.

• Option Writer: The seller of a contract who receives the premium and is obligated to buy or sell if the holder exercises their option.

• Underlying Asset: The financial product (like Bitcoin or a stock) that the option is based on.

• Strike: The agreed-upon price. 

• Expiration Date: The date the option expires. 

Buyer losses are limited to the amount of premium paid. If a call or put option costs $200 and expires worthless, the buyer’s maximum loss is $200. 

However, the risk to sellers is considerably higher. 

• The maximum loss on a put equals the strike price minus the premium received. If the asset’s value falls to zero, the seller must still purchase it at the agreed price.

• The maximum loss on a call is theoretically unlimited, since the asset price can continue to rise while the seller remains obligated to deliver at the strike price.

Crypto Futures

A futures contract is an agreement to buy or sell a cryptocurrency at a predetermined price and date. They’re a common institutional entry point because they allow for precise hedging without asymmetrical upside or downside.

• Linear Exposure: Profit or loss moves proportionally with the price of the underlying asset.

• Settlement: Can be digitally settled (via cryptocurrency) or with fiat currency.

• Use Case: Hedging future obligations by locking in prices, or speculating on directional movements. 

Crypto Perpetual Futures

Perpetual contracts are similar to futures, except they have no expiration date. To keep prices aligned with underlying market prices, they include a “funding rate” fee, where those on the winning side of a trade pay the loser and vice versa. Fees for crypto perps are paid daily, often every eight hours.

The advantage of a “perp” is that traders can maintain hedged positions indefinitely, without needing to purchase new contracts as expiration dates come and go. The disadvantage is that when markets are unbalanced, fees can erode profits or amplify costs. 

It’s essential to continuously monitor perpetual futures, as small imbalances can compound over time. 

Trading Crypto Derivatives

The crypto derivatives market exceeds billions of dollars in daily trade volume across leading exchanges and institutional trading platforms.

However, before trading, risk teams should evaluate:

• Exchange Credibility: Prioritize regulated crypto custody solutions that offer transparent trading, segregate client assets, and adhere to Anti-Money Laundering and Know Your Customer (KYC) standards.

• Collateral Custody: Secure custody of margin collateral and underlying assets reduces counterparty risk and simplifies audit trails. (See BitGo’s article on cold vs. hot wallets for custody best practices.)

• Liquidity Sources: Platforms with access to deep liquidity support more accurate hedging by mitigating slippage.

• Regulatory Considerations: Ensure an institution’s exposure and chosen crypto derivative exchange adhere to domestic and international legal frameworks. 

• Technology Integration: Confirm that exchange APIs, reporting tools, and risk dashboards integrate with internal systems. 

Building Institutional Confidence in Crypto Derivatives

As digital asset markets mature, institutions need risk management frameworks that mirror traditional financial markets, with grounding in qualified custody, sound governance, and transparency.

BitGo supports derivative trading with regulated and insured custody solutions, institutional-grade wallet services, seamless API integration, and support for compliance teams navigating regulatory uncertainty. BitGo’s solutions help institutions gain exposure to digital assets without compromising governance or asset security.

FAQs

Why do institutions use futures, options, and perpetuals?

Institutions trade derivatives to hedge volatility, gain synthetic exposure to digital assets, improve portfolio efficiency, and trade on margin. 

What are the key differences between futures, options, and perpetuals?

Futures provide linear exposure to assets, with gains and losses directly proportional to underlying asset price movements.

Perpetuals are similar to traditional futures but have no expiration date and feature “funding-rate” fees designed to equalize differences between contract and market prices.

Options allow hedging and trading on margin with asymmetric returns. Buyer losses are limited to premiums paid, while option writers take on considerably more risk.

How do initial and maintenance margin work, and when do liquidations occur?

Initial margin is the capital required to open a position, while maintenance margin is the minimum amount that must remain to keep a position open. 

Liquidations occur when price movements reduce the maintenance margin to less than the minimum threshold. In this case, exchanges issue margin calls and may automatically liquidate positions. 

What is funding-rate risk in perpetuals, and how does it affect hedges?

Funding rates ensure perpetual contract prices stay close to current market prices. When markets skew one way or the other, those “winning” the trade pay the “losers” and vice versa. 

Funding-rate risk refers to the potential cost of ongoing fees.

How should we custody and transfer collateral securely to trading venues?

Institutions should custody collateral with qualified custodians and use secure transfer channels to mitigate counterparty risk. BitGo enables traders to fund and settle trades directly on its platform, ensuring assets are safely stored and insured throughout the trading lifecycle.