Cash Settlement Vs Physical

Cash settlement and physical delivery are the two primary methods for resolving derivative contracts at expiration. Cash settlement involves the payment of the difference between the strike price and the settlement price in a fiat currency or a stablecoin, without any transfer of the underlying asset.

Physical delivery requires the actual exchange of the underlying asset, such as Bitcoin or Ethereum, between the buyer and the seller. Cash settlement is generally preferred in crypto markets for its convenience and lack of requirement for asset custody or transfer infrastructure.

Physical delivery is more complex but is sometimes used in specific institutional settings where the holder desires to own the underlying asset for long-term holding or staking purposes. Choosing between these methods depends on the specific goals of the participant and the infrastructure of the exchange.