For many crypto traders, your first interaction with cryptocurrency will likely be a spot transaction, where you trade cryptocurrency for immediate delivery at the current market rate. As one of the easier investment approaches to grasp, it is intuitive to want to stick to spot trading. However, to level up and truly profit from the lucrative crypto sphere, the next logical step involves learning other trading strategies so you can leverage the one best suited for you and diversify your portfolio. Among the many ways to trade cryptocurrency, futures trading is a popular approach. In a futures transaction, you trade a contract that obligates you to buy or sell a particular asset at an agreed price on a specified future date. Both spot and futures trading come with their respective pros and cons. To help you understand how best to harness these crypto trading strategies to your advantage, BIT digs deeper into their fundamental differences below.
1. Leverage in Crypto Spot and Futures Trading
Like any other investment, money-making is the top agenda of crypto trading. This makes the leverage you get from spot and futures trading a topic of key interest. Leverage is essential as it enables you to trade crypto with more capital than you have, empowering you to amplify potential gains with the least investment. Leverage is not typically available in spot trading, but it is maximized in futures trading. This is because a spot trade involves the immediate purchase or sale of a cryptocurrency at the current market price. Meanwhile, futures allow you to speculate the price before opening a position.
Let’s assume you want to buy Bitcoin because you expect its price to soar. In the spot market, one Bitcoin may cost you US$1,000. However, with a futures contract, you can open a position for Bitcoin with 10 times leverage. This means only US$100 will come from your funds, and the remaining US$900 will come from borrowed capital. In essence, your US$100 will have the same purchasing power as US$1,000 in the spot market. If the price of Bitcoin increases to $1,100 as anticipated, your gains will be amplified as follows:
However, leverage is a double-edged sword; thus, trading crypto futures with leverage can also magnify your losses. For instance, if, contrary to your expectations, the value of Bitcoin drops to US$900 instead, your losses are similarly increased as follows:
2. Liquidity in Crypto Spot and Futures Trading
Apart from maximizing your returns, the ease of trading cryptocurrency, otherwise known as the market’s liquidity, should also be considered. After all, the amount of profit you can reap is meaningless if it is nearly impossible to realize these gains. Between spot and futures trading, the futures market is often more liquid. With the ability to trade quickly, the overall volume of trading activity in the futures market will be higher. Consequently, the difference between the bid and ask prices is lower as there is a higher chance of you finding a buyer or seller to take or offer a particular position when there are more participants in the market. Thus, it will become easier for you to realize profits from a crypto trade, and your potential costs of entry and exit will be lower.
Another difference between spot and futures trading that you should be aware of is the flexibility of each of these trading approaches. With spot trading, you own the cryptocurrency and earn gains when its value appreciates. On the other hand, what you own in a futures transaction is a contract. This allows you to speculate on prices and enter contracts that enable you to benefit regardless of the direction of price movements. To illustrate this concept, assume the price of a particular cryptocurrency falls. If you have anticipated this and obtained a futures contract that obligates you to sell the said cryptocurrency at a higher price, you will reap profits despite the downward price movement. In this regard, futures trading offers a better means to hedge against risks. It is also useful when you want to employ more sophisticated crypto trading strategies, such as arbitrage.
4. Crypto Futures vs Spot Trading Prices
Lastly, the price of a cryptocurrency on the spot market is the price at which spot transactions are settled. Meanwhile, the futures price comprises the current spot price plus the futures premium, which can be positive or negative and is affected by changes in supply and demand. By accounting for premiums, futures trading enables traders to capitalize on price volatility compared to spot trading.
Crypto Spot and Futures Trading Made Safe with BIT
As a more straightforward approach, spot trading is an excellent way for beginners to start investing in crypto. However, the strategic advantages and chance to reap significant profits from futures trading make it an equally valuable strategy for investors. Ultimately, the best approach depends on your experience, risk appetite, and how adept you are at risk management. This is where BIT can fill the gap for you. As a full-suite cryptocurrency exchange sporting a sophisticated unified margin system, Bit enables you to trade based on your total US dollar holdings. With this unparalleled flexibility and convenience of managing all trading products under one account, you can easily offset losses in one instrument with gains from another. Complementing this is our exclusive Portfolio Margin, which comprehensively evaluates your portfolio risk and updates your margin requirements. Through this, BIT ensures that you always have robust risk coverage with zero compromises on capital efficiency, empowering you to try out different trading strategies on your terms. Unlock greater possibilities in crypto trading safely with BIT today!