​

Instruments & Market Mechanics

This document covers the various financial instruments available for trading and the specific mechanics governing each market type, including derivatives, leverage, and crypto-specific considerations.

​

Spot Markets

Direct exchange of assets at the current market price with immediate settlement. The simplest form of trading. Key characteristics:

• Immediate ownership transfer
• No leverage (unless margin is used)
• No expiration dates
• Settlement typically T+0 for crypto, T+2 for equities

​

Derivatives

Financial contracts whose value derives from an underlying asset.

​

Futures

Standardized contracts to buy or sell an asset at a predetermined price on a future date.

​

Options

Contracts giving the right (not obligation) to buy (call) or sell (put) at a specific price before expiration.

​

Perpetual Swaps

Crypto-specific derivative with no expiration date, using a funding rate mechanism to anchor the price to spot.

​

Leverage

Using borrowed capital to increase the potential return of an investment. Amplifies both gains and losses. Crypto leverage considerations:

• Exchange-provided leverage ranges from 2x to 125x
• Liquidation occurs when margin falls below maintenance level
• Funding rates on perpetual swaps can be a significant cost
• Higher leverage requires tighter stop-losses

​

Crypto-Specific Mechanics

​

24/7 Trading

Cryptocurrency markets operate continuously with no closing bells or weekends.

​

Decentralized Exchanges (DEXs)

Automated market makers (AMMs) using liquidity pools instead of order books. Key concepts include impermanent loss, slippage tolerance, and gas fees.

​

On-Chain Settlement

Blockchain-based settlement provides transparency but introduces gas costs and confirmation times.