Crypto Futures vs Crypto Spot Trading: Understanding the Difference
Crypto trading can be done in a variety of ways. The most common platform for crypto traders is cryptocurrency exchanges. The best part about crypto exchanges is that, unlike regular trading marketplaces, they do not take a break. For the full year, they run every hour of every day. In addition to trading, you can also deposit and withdraw funds from your account at any moment. With all the latest developments in the crypto space, speculating crypto prices and subsequently trading them have become more preferred than merely buying any of the cryptocurrencies. This article will look at the two most common types of crypto trading - crypto spot trading vs crypto futures trading.
What is crypto spot trading?
Crypto spot trading is a type of trading in which a trader purchases a cryptocurrency and holds it for some time until its value rises or uses it to buy other currencies that have the potential to rise in value in the future. The technique for crypto spot trading is simple and straightforward: the user first obtains a crypto wallet or crypto exchange account, then purchases their chosen cryptocurrency, and when the cryptocurrency's value rises, they sell it for a bigger profit.
One of the most appealing aspects of holding cryptocurrencies in the spot market is that you can make significant capital gains as the value of your cryptocurrency increases over time. Another appealing feature of the cryptocurrency spot market is the near-instantaneous settlements. All deals are immediately completed once an equivalent bid and ask offer are made.
What is crypto futures trading?
On the other hand, crypto futures trading differs from crypto spot trading in that it does not require customers to own any underlying asset, which in this case is the cryptocurrency they intend to trade. Crypto futures allow speculative exposure by requiring two parties to agree to buy or sell an asset on a predetermined date and at a predetermined price. Instead of the underlying currency, users instead own these contracts.
In crypto futures trading, users don’t actually buy or sell the asset. Instead, the value of the contract will be set in such a way that it follows the price of the asset. Consequently, with the increase or decrease in the value of the asset, the value of the contract will also keep changing. In this way, traders can benefit from the price movements of their chosen asset without having to actually buy it or sell it.
Futures contracts are similar to bets in that they allow traders to speculate the future price of an asset. Traders will bet on the price of Bitcoin and other cryptocurrencies, and whether they make a profit or loss will depend on the accuracy of their prediction. The participants can select whether they want to go long or short, counting on an increase in price for the former and anticipating a decline in price for the latter. Both parties usually settle on the contract's expiration date, and the contract ends as a result.
Let us now look at some of the major differences between crypto spot trading and crypto futures trading.
Key differences between crypto spot and futures trading
The most significant distinction between spot and futures prices, as we saw above, is that although spot prices are for immediate deals, futures contracts defer payment and delivery to predefined future dates. Both also require their own, specialised crypto trading strategies. Beginner traders may want to look at some crypto spot trading guides or crypto futures trading guides before they begin.
Other key differences for crypto spot vs crypto futures trading are as follows:
- Liquidity
With a monthly turnover that can exceed trillions, the futures market can be more liquid than the spot market in general. Also, because liquidity is so high, price discovery is more precise, and there are fewer risks and slippages.
- Flexibility
In terms of flexibility, the crypto futures market has the upper hand because crypto traders can profit from downtrends even when the price of an asset falls. This is due to the fact that futures contracts allow traders to profit from short-term price fluctuations in either direction. Futures contracts can also be used to safeguard portfolios from high price volatility and hedge against downside risk. In the spot market, however, traders can only earn if prices rise.
- Leverage
Leverage is a key feature that draws traders to the futures market since it makes the market more capital efficient. The more leverage you have, the less money you'll need to put into a futures position. On the other hand, spot trading does not provide leverage.
For example, if you were to buy one bitcoin using spot trading, you would require a considerable sum of money based on the current market price of bitcoin. On the other hand, Futures trading allows you to open a bitcoin futures position for a fraction of the cost by using a futures contract, which is only feasible due to leverage.
- Prices
The spot price is the price that governs all spot market transactions, whereas the futures price is calculated using the current spot price plus the futures premium. This premium on futures might be positive or negative. A positive premium implies that the futures price is higher than the spot price, whilst a negative premium indicates that the futures price is lower. In most cases, the spot price is usually lower than the futures price.
Crypto Spot Trading vs Crypto Futures: Conclusion
While crypto spot trading has its own set of advantages, crypto futures trading undoubtedly offers more flexibility, more liquidity, and lesser risks for traders. Before jumping on the crypto-trading bandwagon, traders should carefully assess the pros and cons of each position and understand the risks deeply so that they don’t end up making huge losses on their trades.
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