Get Into Cryptocurrency Trading Today

Spots and futures trading are vital ecosystems in the cryptocurrency market. Understanding the difference between crypto spot trading and crypto futures is one of the first steps of becoming a savvy crypto trader.

What is crypto spot trading?

Crypto spot trading refers to the process of buying and selling virtual currency like Etherium or bitcoin for instant delivery. That means traders directly exchange cryptocurrencies through buying and selling. As a trader, you possess direct ownership for cryptocurrencies in a crypto spot market, and you also have legal rights such as staking or voting for major forks.

Crypto spot trading is the most basic form of investment you can make. You can buy any digital currency you believe may increase in value, hold it, or trade (buy or sell) it against another crypto or fiat currency, depending on your strategies or trends you observe. Exchanges like Binance offer crypto spot trading allowing users to trade crypto to crypto or crypto to fiat. 

Spot exchanges serve as intermediaries for users to bid and seek a crypto asset. When the bid of offer gets a match, the exchange facilitates the transaction. They are on 24/7, which means that you can spot trade anytime.

For example, if you want to buy bitcoins using fiat currency such as USD, you can look for an exchange spot market that facilitates BTC/USD trading pairs. Then place a buy order for your desired amount and price. When your transaction is complete, your bitcoins are stored in your spot wallet where you can hold them, and their value rises, or you can exchange them for other cryptos likely to increase in value. When you hold your cryptos, you benefit from capital appreciation in the spot market because your cryptos rise in value over time.

What is crypto futures trading?

Crypto futures trading involves trading contracts or agreements that stand for the actual value of a particular cryptocurrency. Whenever you buy a crypto futures contract, you don't own the underlying cryptocurrency but instead agree to purchase or sell specific crypto at a future date.

Unlike crypto spot trading, crypto futures trading does not reward you with economic privileges such as staking or voting. As you know, the crypto market is highly volatile, and crypto futures contracts protect you against volatility and detrimental price movements on the involved asset. Futures are also a proxy tool for users to speculate on the potential value of a specific cryptocurrency.

That means you can take advantage of crypto volatility. You can speculate on a cryptocurrency's rice instead of buying the asset itself. Whether prices rise or fall, you can participate in a cryptocurrency's movement easily with futures contracts. Simply put, if you predict an asset's value to go up, you will buy a futures contract to go long, and if you expect the value to go down, you sell to go short. Therefore, your profit or loss depends on the accuracy of your prediction.

Derivative exchanges, including Binance futures, cater to the trading of derivative products like cryptos futures 24/7. The remarkable thing about derivative exchanges is that they provide asset risk management mechanisms like insurance funds because of the complexity of the products.

Crypto spot VS crypto futures trading: critical differences

Liquidity 

The futures markets provide more liquidity with monthly volumes in trillions. For instance, the bitcoin futures market witnesses a $2trillion average monthly turnover, which is far higher than bitcoin spot trading volumes. The robust liquidity of the futures market allows price discovery, and traders can transact efficiently and swiftly in the market. 

Spots vs. futures prices

The spot price, which is the price of a digital currency in a spot market, is the ruling price for every spot transaction. Traders or buyers and sellers determine crypto spot prices via the supply and demand economic process. 

The crypto futures price is based on its prevailing spot price in addition to the cost of carry on the interim before delivery. The basis stands for the cost of carry of a futures contract which can be a positive or negative number. As such, a positive basis relationship means that the future price trades more than its spot price and vice versa. Changes in supply and demand may cause the basis to fluctuate, but forces of arbitrage cause it to get to zero on the expiration date.

Leverage

Many crypto traders are attracted to the futures market because of leverage that makes futures trading incredibly capital efficient. For example, to buy 1bitcoin in the crypto spot market, you need thousands of dollars- $57,794.51 in the current market rate. However, you can open a bitcoin futures position at a fraction of the cost with a futures contract which is only possible with leveraging. As the leverage gets higher, the lesser you need to spend on a position.

In comparison, crypto spot trading does not provide leverage. For instance, if you have $5000, you can only buy bitcoins worth that amount.

Flexibility to long or short

Whenever you buy cryptocurrencies in the spots market, you can only profit from the prices go up, but in the bear market, you can't benefit. On the other hand, futures contracts allow you to profit from short-term price movements despite the direction. If the cryptocurrency price falls, you can take part in the downward trend.

That means with crypto futures trading, you can develop trading strategies like arbitraging, short selling, trading pairs, etc. Moreover, you can use futures contracts to hedge against downside price movement and protect your investment from high volatility in the market or unexpected risks.

CONCLUSION

Crypto spot trading is a great starting point for beginners, while crypto futures trading requires extensive knowledge and risk management strategies to avoid significant losses.

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