Spot Trading vs. Futures Trading in Crypto: Key Differences



When it comes to trading cryptocurrencies, there are two main types of trading that people typically engage in: spot trading and futures trading. Both of these have their own advantages and disadvantages.


Spot trading is the more traditional form of cryptocurrency trading. You simply buy or sell cryptocurrencies at the current market price. This is similar to how you would trade stocks on a stock exchange. Futures trading, on the other hand, is a bit more complex.


With futures trading, you're essentially betting on the future price of a cryptocurrency. You're essentially making a contract with someone to buy or sell a cryptocurrency at a specific price at some point in the future. If the price of the cryptocurrency goes up, you make money. If it goes down, you lose money.


Futures trading is a bit riskier than spot trading, but it can also be more profitable. It's important to understand the key differences between these two types of trading before you decide which one is right for you. In this article, we're going to break down the key differences between them.


What is spot trading in crypto?

Spot trading is the most common type of trading in the crypto world. It is simply buying and selling crypto assets on a spot market. A spot market is where people buy and sell assets, usually for immediate delivery. The most popular spot market for crypto is called a CEX, or centralized exchange. On a CEX, people can buy and sell crypto using fiat currency (like USD), stable coins (like BUSD or USDT), or other cryptos (like BTC and ETH).


There are also many benefits to spot trading. For one, it is a great way to buy cryptos that you want to hold long-term. You can also spot trade for profit. Some people even use spot trading as a way to benefit from the volatility of the crypto markets.


What is futures trading in crypto?

Futures trading is a type of derivative trading that allows buyers and sellers to trade futures contracts on the price of an asset. The most common underlying assets are cryptocurrencies, commodities, and stocks. Futures contracts are standardized by exchanges, which dictate the underlying asset, contract size, and delivery date.


Because futures contracts are traded on margin, traders can adjust their leverage to suit their needs. For example, a trader with $10,000 in their account can trade a $100,000 position by using 10x leverage. This means that for every $1 move in the underlying asset, the trader's account will gain or lose $10.


Futures contracts can be either long or short. A long position means that the trader expects the price of the underlying asset to increase. In contrast, a short position means that the trader expects the price of the underlying asset to fall. To open a long position, the trader buys a contract from another trader who is selling. To open a short position, the trader sells a contract to another trader who is buying.


In order to close a position, the trader simply takes the opposite trade. For example, if a trader has a long open position and wants to close.


Key differences between spot and futures trading

Spot and futures trading are two of the most popular types of trading. Both involve buying and selling assets in order to profit from price changes, but there are some key differences between the two. Spot trading refers to the practice of buying and selling assets at their current price, with no margin or leverage.


This means that there is less risk involved but also potential for smaller profits. Futures trading, on the other hand, involves buying and selling contracts for the future delivery of an asset. These contracts are often highly leveraged, meaning that a small price change can result in a large profit or loss.


In addition, futures contracts have a finite expiry date, so traders must be careful to close their positions before this date. Finally, it is important to note that spot trades can be either long or short, while futures contracts must be held until expiration.


Trading on a CEX typically involves spot trades, while margin trading on a derivatives exchange usually entails futures contracts. As such, it is important to understand the key differences between these two types of trading before deciding which one is right for you.


Price

Cryptocurrency futures and spot markets are both important venues for traders seeking to buy or sell digital assets. However, there are some key differences between these two types of trading. One of the most notable is the price difference. In general, prices in the spot market are lower than those in the futures market.


That is because the spot market is more liquid, meaning there are more buyers and sellers willing to trade at any given time. This results in a smaller spread between the "bid" and "ask" prices, which benefits traders looking to buy or sell at the current market price. Additionally, spot prices, along with future prices, could be equally influenced by outside factors such as news or events.


By understanding the key differences between these two types of markets, traders can make more informed decisions about where to buy and sell their assets.


Expiry

In spot trading, when a contract expires, the trader is simply given the option to renew their contract with the same counterparty at the prevailing market rate. However, in futures trading, when a contract expires, the trader is obligated to either take delivery of the underlying asset or settle their position with cash.


In the world of crypto, many centralized exchanges provide perpetual spot futures contracts so that you can keep your position open for as long as you want. However, it can have major implications for traders, especially if they are holding a large position. Therefore, it is important to be aware of the expiration date of your future contract and to plan accordingly.


Commodities

Cryptocurrency spot markets are generally quoted in terms of US dollars and futures in terms of bitcoin. The fee for trading on a spot market is generally much higher than trading on a commodity futures exchange. The reason for this is that spot markets are "cash and carry" markets, meaning that you have to pay for the cryptocurrency in full when you place your order.


If you want to buy Bitcoin on a spot market, you have to pay the full price of Bitcoin at the time you place your order. In contrast, when you trade Bitcoin futures, you only have to put down a small deposit (margin) to open a position.


The price movement of the underlying cryptocurrency matches the price of the futures contract. So, if Bitcoin's spot price falls by 10%, the price of the Bitcoin futures contract will also change by 10%. Due to high liquidity in the futures contract, tracking the price of an asset is better in future contracts.


Leverage

In leverage trading, traders can enter into contracts that leverage their position. This means that they can trade with more money than they have in their account. For example, if a trader has $1,000 in their account and enters into a leveraged contract with a ratio of 10:1, they can trade as though they have $10,000 in their account. Leverage can be a great way to increase your potential profits. However, it also comes with high risks.


One of the biggest risks is hitting the liquidity price. In future trading, you could lose all your money if the price goes other ways and hits the liquidity price. In spot trading, you can only lose all your money if the price of an asset goes to zero, which is highly improbable for a genuine project.


However, software bugs and many other factors could affect the price, and it could fall more than 90% in a bear market. Whether you trade with spot or leverage, it is important to be aware of these risks and trade accordingly.


Long and short

In cryptocurrency futures trading, there are two main ways to trade: long and short. When you go long, you buy first and then sell later when the price has increased. When you go short, you do the opposite - sell first and then buy back later at a lower price. In future contracts, you bet on whether the price of a cryptocurrency will go up or down in the future. These contracts are usually long or short, with margin.


Margin is the amount of money you need to put down to open a position. For example, if you're buying a $100 contract and the margin is 10%, that means you only need to put down $10 to open the position. If you're right about the price direction, you make money; if you're wrong, you lose money. Thus, when trading cryptocurrencies, it's important to carefully consider whether you want to go long or short, as well as how much margin you're comfortable with.


On the other hand, spot buy allows you to buy an asset and hold those tokens/coins in your wallet. When the price goes up, you can sell your tokens and get your profit. You cannot open a short position in spot trading. However, if you buy at the spot and the price goes down, you may have to wait for the price to recover, but you can have peace of mind as the price of an authentic project falling to zero is unlikely.


Liquidity

The amount of tokens that are available to trade at a particular price is known as liquidity. In order for traders to be able to buy and sell an asset quickly and at a fair price, there must be enough liquidity in the market. Unfortunately, many cryptocurrencies do not have enough liquidity to support active trading.


As a result, prices can be volatile, and trades can be difficult to execute. However, most exchanges allow traders to place "limit orders" that guarantee a certain price. With these types of orders in place, traders can be more confident that they will be able to execute their trades at a fair price. In May 2021, Bitcoin achieved the highest futures trading volume of over $2 trillion, which exceeded bitcoin spot trading volume.


Key Takeaway

When trading cryptocurrencies, investors can choose between spot and futures markets. Both have their own advantages and disadvantages, but which one is right for you will depend on your investment goals. Spot markets offer a simpler way to trade cryptocurrencies, as they work similarly to other asset classes such as stocks or commodities. You buy an asset at a certain price and then sell it later when the price has increased.


Futures markets, on the other hand, are more complex and allow you to hedge against price movements in the underlying asset. However, they also offer the opportunity to profit from both rising and falling prices.


When choosing between spot and futures markets, it's important to consider your investment goals and risk tolerance. If you're simply looking to buy and hold an asset, then spot markets may be a better option. However, if you're looking to take advantage of price movements or hedge against them, then futures markets may be a better choice. Ultimately, the decision of which market to trade in will come down to your individual needs and preferences.

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DISCLAIMER

This article does not constitute any financial advice, and all suggestions/recommendations in this post are for informational purposes only. Elite Cash does not bear any responsibility for your loss. Please consult your financial advisors before investing in cryptocurrencies.