Since the cryptocurrency market has exploded, trading platforms for cryptocurrencies are no longer solely limited to the Spot market; instead, new hybrid markets with intricate derivatives products have emerged. Crypto futures is one such derivative product.
Normally, when investors hear phrases like derivatives and futures, they become anxious and perplexed, but if you want to advance in the realm of cryptocurrency trading, trading crypto futures would be the next natural step for you. The majority of skilled traders engage in crypto futures trading; however, this article may aid you in better grasping the ideas of what they are and spot trading vs futures.
Before going into the distinctions between the two, let's first define what cryptocurrency spot trading and cryptocurrency futures trading are.
What is Spot Trading?
In a spot market, financial products including currencies, securities, and commodities are exchanged for immediate delivery. Spot trading entails the real delivery of the coin and instantaneous payment and delivery.
Spot trading is the term for each time you visit a cryptocurrency exchange, hit the buy or sell button, and the transaction is finished right away, meaning that ownership is transferred, and payment is made in real-time.
The most popular kind of cryptocurrency trading is called spot trading, in which investors acquire cryptocurrencies at current market values and hold them until their prices rise to sell them for a profit at a greater price than what they were initially purchased at. A spot price is a term used to describe any asset's current market value.
It is the simplest and the most fundamental kind of trading.
When buying cryptocurrency through spot trading, ownership of the asset is transferred to the buyer, allowing investors to stake it and earn interest from it or cast a vote on important issues.
Advantages of Spot Trading
1. Crypto spot trading is simple to understand since transactions are carried out simply and easily.
2. There is just one price involved, the spot price (Current market price), which is transparent since it is based on supply and demand.
3. Because investors trade directly in assets rather than the value produced from them, they can stake money and receive interest.
Disadvantages of Spot Trading
1. It might be uncomfortable to hold unprofitable bitcoin assets, and you must keep them safe.
2. Because leverage costs are substantially greater in the spot market, there are fewer possibilities to make money.
3. Exchange wallets holding cryptocurrency assets are vulnerable to hacking, which might result in significant losses for investors.
What are Derivatives?
A derivative is a type of financial contract whose value is based on how well an underlying asset performs. Currency, stocks, commodities, or financial assets are examples of underlying assets. In a derivative contract, the underlying asset is not really delivered, and ownership of the underlying asset is not required.
For instance, if you purchase a BTC/USD contract on the derivatives market, you are not actually purchasing bitcoin in this case; instead, the value of your derivative contract will fluctuate in line with the price of BTC/USD. The value of your contract decreases if the price of BTC/USD declines, and vice versa.
Contracts including derivatives are frequently used to lower risk exposure or as insurance against the price volatility of cryptocurrencies. Investors can make predictions about the price of cryptocurrencies using crypto derivatives.
What is Crypto Futures Trading?
An example of a derivative contract is a futures contract, which gets its value from an underlying asset, such as a cryptocurrency. You choose whether to sell or buy the underlying cryptocurrency in a futures contract at a predefined fixed price.
When you buy a futures contract, you don't actually own the underlying cryptocurrency; instead, you trade at speculative pricing. As there is no ownership of the underlying coin, there is therefore no economic incentive to stake and earn interest.
Your profit or loss in a futures contract will rely on how accurately you anticipate whether the price of the cryptocurrency will rise or fall. Therefore, futures contracts allow investors to profit even during a bad market. You will either take a long or short position depending on your guess.
When it is anticipated that the price of the cryptocurrency will decrease, a short position is placed.
When the price of the cryptocurrency is anticipated to increase, long positions are taken.
Advantages of Crypto Futures Trading
1. Leverage allows for gains that are far greater than those in the spot market.
2. A bearish market can be profitable.
3. Flexible techniques can be used to manage risk exposure.
4. It extends beyond just buying and selling.
Disadvantages of Crypto Futures Trading
1. Due to the volatility of the cryptocurrency market, there is a considerable risk associated since speculative investments might result in significant losses.
2. Because investors do not own the underlying coin, they are unable to gain economically from staking and voting.
Crypto Spot trading VS Crypto Futures Trading
Leverage enables traders to open 1 BTC future positions for a tiny fraction of the 1 BTC's market value, making futures trading capital-efficient by allowing investors to make the most return with the least amount of capital invested. There is no leverage available on a spot market, so you must pay the going rate, which is hundreds of dollars, to purchase one bitcoin.
2. Spot Price VS Future Price
In the spot market, every transaction is completed at the same price, which is the current price. Future prices, on the other hand, are determined by adding the futures premium to the spot price. A positive future premium indicates that the spot price will be less expensive than the future price, while a negative future premium indicates that it will be more expensive.
3. Counterparty Risk
A seller and a buyer are involved in every futures transaction, and if one of the parties breaches the contract on the agreed-upon date, the contractor may be hesitant to make good on their end of the bargain. Since a deal is made upfront in the spot market, there is no formal counterparty risk.
4. Long or Short Flexibility
Only when the value of the cryptocurrency owned increases in value can you profit on the spot market. However, you may take both long and short positions on a futures market, and by going short, you can make money even while the price of a cryptocurrency is falling. Additionally, this will shield long-term investors from the turbulence of the cryptocurrency market.
We hope we have cleared all your doubts regarding spot trading vs futures. Make sure you do in-depth research and gain experience as a spot trader before entering the derivatives platform but don’t wait too long and miss out on opportunities to earn substantial gains from the derivatives market.
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