Understanding Cryptocurrency Derivatives and Market Trends

hello everyone so this is the next mix video in the series about cryptocurrency investment i've been making uh a few

videos about explaining or simplifying cryptocurrency investment for people who

never done trading before who never understood what cryptocurrency is um and in that series this week is a bit

important because the prices of crypto are dropping rapidly this week it's

some of the cryptos are probably down like you know 25 30 percent in value like uni swap is probably like

down almost 60 percent in value there are a few cryptos that has run really badly this week and it's like a

bloodbath and there's also a talk in the town about uh cryptos being banned crypto trading

being banned in u.s and uk and there's an fca ban that's being talked about uh financial contract authority of uk

planning uh crypto so there's a lot of talk about it so today we're going to be looking at why

are cryptos going down this week what are some of the reasons and also some also the news about crypto

uh crypto ban so let's start with the crypto bank there is an fca ban on cryptos but it is

not for crypto trading it is for crypto trading crypto derivatives trading what is the difference between crypto

trading and derivatives trading so derivatives are basically a different form of trading on a

commodity so in a normal trading process you buy a commodity you sell a commodity for

either profit or a loss derivatives are basically where you don't actually buy the commodity or sell

the commodity in the first place but you are betting on the uh price of the commodity to either go up or go down

and you're trying to make a profit out of that so how is there is there an analogy uh like

let's take a cricket match for example right in ipl uh the owners buy a team by a player they

invest money in it and then when the when the team does well they get profit out of it and the

responses who actually pay into the uh the team and then you know as and when they perform well there is a

vested interest in getting profit out of it when the team wins they get a prize money

um without being connected to the the team at all there is a sports betting that happens you know

whether or not which team is going to win like if chennai is playing kolkata today

you know will will chennai win or which will kolkata win they bet against it or bet for it and then they are

not connected to the um ipl ecosystem at all but they're basically trying to make money out of it

this is kind of a good analogy to derivatives as well um then you know why did the government

even allow derivatives in the first place derivatives are not just for crypto or reward is therefore every

commodity are therefore shares therefore commodities therefore crypto there are some good things about

derivatives as well so we'll explain what is a derivative before we actually go into a

commodity um before we go into the crypto ban for derivatives and how it affected the prices of

cryptos and what does the uh ban mean to cryptos in the in the real sense

um one thing before we go into it right so the fundamental question is if if they

are trying to make a profit and we are also trying to make a profit by buying and selling a commodity you

know how is it different why is it um different ethically the concept is different like if

if we are actually say buying a commodity and selling a commodity or we are investing in a share

then it's like take uh um take a vendor who's selling onions in the in the shop and

you are when you're buying a share you're basically giving him money to you know conduct his business so he can

buy equipment for it he can buy the audience you can you can actually do the uh job because of the money that

you're investing in him and then the profits that he gets uh if he gets more profits then you are

getting more profits as well you you're basically helping the ecosystem but in a

derivative concept somebody who's standing in the road

not contributing to this ecosystem not helping this onion vendor they're basically betting whether the price of

the onion is going to go up or come down so that's in a way it is a danger to the ecosystem

because they are actually betting against the price coming down or betting for the

price coming down and the onion vendor may not get any profits at all because of that so let's

start with the typical definition of derivatives and let's go into a few examples so if

you take a technical definition of derivative it says that it's a contract between two parties

um based on underlying financial asset and if they're speculating on the price movement of future price movements

of the asset and they're trying to book a profit and if you actually look at the

the technical details of it it talks about different kinds of derivatives like futures options swaps

hedging price predictions and it's a really difficult terminologies to understand

so what i'm going to do is i'm going to basically take two good examples of derivatives which then make you

understand why they exist in the first place so let's take an example where there is an

airline company um like jet is somebody who's like basically trying to

fix their total cost of the year control the total cost of the year so jet fuel is something that is going to

go up and down every month and what they're doing is basically they know how much quantity of jet fuel they

are using every month so let's say they are using 10 liters per month right and the price in the

beginning of the year is like thousand rupees per uh litter and uh what they're doing is

they're going to a petrol vendor they're going to a petroleum provider and saying that look

let's fix up an agreement where i will buy 10 liters of petrol from you the whole of this year every month i'll

buy 10 liters but let's fix the price at thousand rupees let's hedge it

it's called hedging process and the petrol vendor let's say they agree right so

irrespective of whether the price goes up or goes down the airline company will pay the petrol

vendor only thousand rupees now what is the benefit right so for example if it goes up in february they

are still paying thousand rupees per liter and which means that they are paying

less and later on in the year when it goes to 600 or 500 rupees they're still paying thousand rupees

they're paying more than the market rate but eventually if you look at it let's say um the the

average price remained um higher in terms of the price that they hedged so they spent like thousand a hundred

and twenty thousand rupees one lakh twenty thousand rupees and uh had they not hedged it uh they

would have spent hundred and thirty four thousand rupees which means that they have saved

fourteen thousand rupees from an airline perspective is it a loss for the petrol vendor no

they had an actual pipeline of sales and they had a commitment from a buyer who was basically willing to

buy 10 liters every month which means that they had a revenue that they could book in their systems as well so

the vendor also kind of profited from it because you know it's not an ultimate loss for from their perspective but

they could have made more profits had they said sold it to the market rate so this is a hedging where it's good for

the airline now the other scenario is that the prices could have come down and the

prices could have stayed low consistently through the year but still from an online perspective

they control their cost they decided that their cost was going to be 120 thousand rupees or 1 lakh 20

thousand rupees and they didn't exceed their budget by even one rupee and that's the advantage that they have the

petrol vendor on the other hand they made a profit of additional profit of eleven thousand

even on the hundred and nine thousand they mean on the one lakh nine thousand they would

have made profits but they made additional profit of eleven thousand so the hedging basically gives um an

advantage for both the buyer and the seller here it's kind of you know it's an advantage for

them to agree on a fixed price for the whole year and it it stabilizes the market for

both of them and controls the expenses for one controls the revenue for the other so that's

kind of a good thing from a hedging perspective now um there are some there are some

share options that are given to the employees in general they are given as a value they are given as money in

to the employees let's assume a company doesn't have money right and but they want to give bonus to

employees so the company's share price is let's say 10 rupees they give an option to purchase 500

shares to the employee which is worth a value of 5000 rupees but the employee has to pay to purchase

it now what's the benefit to the employer because he really has to pay money to

buy it and the company is actually not spending any money because they're not giving it for free as well

the catch is that the employee has one year before which they can actually buy this shares

with for this price let's assume within the one year period or after the one year period its

share price is going up to 30 rupees at that point of time now the employee can exercise his option

and he can buy the 500 shares at that point of time and he only pays 5000 rupees because it's

a 10 rupees for him so he pays 5000 rupees but the share value today is 15 000 rupees

which means that he immediately made a profit of 10 000 rupees and he doesn't have to buy it it's it's

there is no obligation for him to buy it it's only giving him an option to buy this is called as options

this is a concept of huge uh futures and uh the advantage is that the company didn't pay any money and

they wanted to give some incentive to the employee but all they did was they gave

an options which meant the employee also had a vested interest for the company's share to grow

so they're basically kind of working hand in hand the employee and the company

to make sure the share price goes up because then its advantages for everyone in that scenario so

this is also a concept of derivative but it is actually a good derivative so there are a lot of good things about

derivatives that exist in place and that's why the concept of derivatives came into picture so derivatives can be

done we saw how it can be done petrol we saw how it can be done shares it can be done any commodities you know

replace the the petrol concept right with with the airline and the petroleum

provider you could replace it with a roti maker in getting his wheat flour from a wheat flour merchant

and it's the same concept or you can make a biryani maker getting his rice from a

rice maker so all commodities can be traded using derivatives and they are getting traded using derivatives

throughout the world hedging is a very good concept options are a very good concept they are all

existing because there is a necessity for them so what's bad right and if there are so many good things about it

what is actually bad um the problem comes in cryptocurrency more because of the volatility of the

price that is existing and there is no real rationale behind why a cryptos price should go up or come down

like shares or like commodities and commodities are based on demand um supply and you know there are so many

other things that determine the commodity prices not just the trading alone but uh from a

crypto perspective we talked about it in earlier videos how volatile the prices can be now quickly the prices can go up

and come down so let's take an example um where there is a crypto called abcd rate

and the price of the crypto in 1st jan 2020 is let's say thousand rupees and somebody a buyer wants to basically buy

the crypto but they don't want to spend the money so they go on purchase options um from the

exchange this is an exchange that is holding crypto and they are giving an option to buy

options so they're buying options saying that okay hundred quantity of crypto you can buy it

anytime during the one month period um and you can buy it at the thousand rupees that it is right now

which means that the value is hundred thousand rupees that that they're actually uh hedging for

they're actually giving an option for and what they what they say is basically um that

you know you pay uh per crypto you pay hundred rupees so instead of paying thousand rupees

you pay hundred rupees per crypto to buy these options which means for the one lakh value of crypto he pays

10 000 rupees for options which means within that one month period at any point of time he can actually

exercise his option and he can buy this crypto now assume that in scenario one um

it's a thousand three hundred rupees on 20th of january which means it's gone up right so

he can exercise his options he goes in and he pays um 100 000 pounds 100 000 rupees and he

buys the crypto the value of the crypto because 1300 rupees at 100 crypto

is one lakh thirty thousand rupees which means he is uh he spent ten thousand rupees for buying

the options originally he spent hundred thousand rupees for buying the crypto today

so his total profit is twenty thousand rupees because he can sell it at 130 000 rupees

now he's made a profit now assume a scenario where the price never goes above thousand

rupees right it stays in thousand rupees so uh let's say on 31st january it's 700 rupees

if he actually goes and access this option buys it then he has to spend a hundred thousand

rupees because he can't buy the 7000 piece if he's exercising the option then he'll

bite at 100 000 rupees which means that he'll make a total loss of nearly 40 000 rupees because

one he's lost out on the crypto another is also paid in 10 000 rupees on the options price right so instead what

he'll do is he'll cut down his losses and he'll just walk away saying that i'll not buy any crypto i'll

it's fine i got my options i'm not going to exercise my options these options goes away

so it's an unused option so the unused option is basically giving the exchange a profit of 10 000 rupees so the

exchange never sold any crypto nobody actually bought any crypto no crypto was being actually physically

sold or bought but the exchange has made profit and the buyer has lost out his ten

thousand rupees um money that he wanted to invest or he invested already so in the uh from uh from an interest

perspective the exchange best interest lies in the fact that the crypto price stays below thousand rupees

for the entire month depending on how many people have invested it now this is one person

buying for ten thousand rupees right let's assume there are ten thousand buyers who actually come and buy options

like this the exchange stands to gain nearly you know 1000

or 10 10 000 crores or um you know 10 million rupees basically uh without even selling one crypto because

10 000 buyers each buying at 10 000 rupees right it's a huge amount of money and if the exchange can maintain the

price below thousand rupees somehow working with whoever it is then they are basically without selling even one

crypto they are making a profit of nearly you know millions of rupees or crores of

rupees now this is where the problem comes in because of the money that is involved

because of the profit that the exchange gains by by manipulating the price there is a

huge price manipulation that goes on because the exchanges also hold our crypto they are actually having our

crypto um they can go and use our crypto to do techniques like shorting

shorting is something where it's an intentional price manipulation where you can actually

uh mass sell a crypto or mass sell a commodity and bring the price down create a panic and

bring the players down so a lot of concepts like these where some are legal some are not legal where

you can actually use these techniques to bring down the price of a commodity or bring down the price of a

crypto in this place and the a lot of fraudulent practices take place because the stakes are very very high

like you know i was talking about 10 000 people but we are talking about millions of people

who are buying options who are buying these derivatives which means the exchanges are getting more and more

greedy and it's becoming like sports betting right where uh you know we talked about sports

betting where two people are uh betting on the outcome of a match chennai vs kkr for example and

if if a lot of people have invested on chennai winning the match then it is the interest of the sports

betting body to make sure that chennai doesn't win the match and they are actually

paying players and going to the extent of paying players to make sure that

china loses the match so that you know they are they are getting more profit out of it

so whichever um whichever team has got more money invested on them by the people they want the

team to lose so that they can actually take the money so that's what happens in uh

crypto as well if people if a lot of people have bought options expecting that the price will go up they

actually want the price to come down or remain lower and this is what is being accused

by the government bodies on the major exchanges so the major exchanges like bit max for

example was recently accused by the us government where uh this criminal charge is being

brought in on the owners of the uh of the uh exchange

and this is probably the the first time something this severe has been taken a lot of actions have been taken against

crypto exchanges before but this has gone to the extent where criminal charges and prison sentences are being

talked about for the owners of bit max exchange so that's why a lot of these exchanges

um you know people keep asking me in comments as well especially in the dominant videos about you know exchanges

that are in india mostly uh where you know do we are we okay to use these exchanges we

are using the reason i suggested coinbase and var0x is because they are practically the gold standard

of uh crypto wallets and crypto exchanges and wazirex is owned by binance

and they are like the number one in terms of you know um the exchanges and wallets and they have

never been accused of any of these malpractices before which is why i suggested uh using them in my episode

3 i even gave a demo of how to register with them and use them so i don't have anything

against the other exchanges or other wallets it's just that i'm not comfortable using some of them i

haven't personally used them so i'm suggesting what i'm personally using that's why um

some of the other wallets are being mentioned so um obviously uh the exchange is being

investigated what it means is that people have bought derivatives people have

put money into it now they can no longer trade or you know whenever the ban comes into place

for example fc has put the ban i think it's given like a couple of months to close out all the derivatives but you

can no longer trade uh the derivatives after that point of time but that that also means that the money has to come

out immediately so there's a lot of money being um lost from the crypto market because of this

which eventually means that the value will come down but all of this will lead to a market

correction because you know eventually when these these derivatives are out of the crypto market then

uh it follows more standard norms in terms of the price going up or going down the price manipulations will come

down which means that it's good for the industry on the longer the other thing is uh uh there was a the

why the crypto price is dropping right so and uh trump has something to do with it

so a couple of months back two or three months back there was a stimulus check that was provided to all the american

citizens um thousand two hundred dollars for every american citizen um because of the kovid 19 because of a lot of people

having unemployment a lot of people not able to work a lot of people having a problem with their income thousand two

hundred dollars was provided as one of the largest stimulus checks or similar

packages ever provided in the history of united states or probably for any country for that matter nearly two

trillion dollars were provided to the american citizens so thousand two hundred dollars for every

citizen and this money was huge for a lot of people and it it meant bread and butter uh or

it basically meant the next meal for many people but a lot of people were okay i mean they were not struggling for

uh money but this meant that they could actually take this money and invest it somewhere which means that

a lot of people decided to invest it in cryptocurrencies and a huge influx of money came into crypto

during that point of time so a second stimulus check was expected um around this time and

uh which meant that people were expecting another thousand two hundred dollars uh from the

u.s government and uh which also meant that another influx of money that's going to come into the crypto industry

or crypto market uh and we talked about market capital and why new money is very important for these

cryptos to go a higher rate uh trump basically tweeted like a couple of days back saying that he's probably

not going to give this second stimulus till the election is over and this is this is a bit of politics so it's going

on the second stimulus that has also created panic because uh one

new money is not going to come in and two people were expecting this stimulus check for uh their their next

meal and now people may have to urgently sell their commodities including cryptos

anybody who's invested in it to get money out of it for um managing their finances for a few days

right so there's a lot of connection uh between the stimulus check and the crypto as well

and it's like a butterfly effect you know one corner of the world something happens

it affects the entire industry and including crypto cryptos no exception for it

so uh everything is interrelated at this point of time and hopefully once all these derivatives

problems are over because in everybody's portfolio is down you know 30 percent to 40

nearly some of the portfolios some of the cryptos are down like nearly 30 or more than 30 percent this week so

expectation is that when all of this stabilizes you know it's going to come back

um to the normal scenarios and hopefully uh things will turn better so uh i hope this video was useful for you

because there's a lot of panic that is out there saying that you know cryptos are being

banned or people can't trade cryptos the truth is cryptos are not being banned it's derivatives which are

being banned and you need to understand derivatives to understand why it is being banned and

what does it mean to um the the crypto trading itself so until next time see you later thanks bye

you