Crypto Futures Trading and Crypto Spot Trading: Definition and Differences

What is Crypto Futures Trading?

Crypto futures reflect the current value of a particular cryptocurrency. Cryptocurrencies cannot be used as collateral for a futures contract. The difference between owning cryptocurrency and owning a contract that allows you to buy and sell it later is that you own the contract.

Futures contracts, or contracts to purchase or sell a particular cryptocurrency, represent the value of that cryptocurrency. A futures contract cannot be used to obtain ownership of the underlying cryptocurrency. It is the agreement in which you purchase or sell a cryptocurrency that you own. Therefore, you do not receive any economic benefits as a result of owning a futures contract.

The price movements of their underlying assets are protected by crypto futures, unlike equities. Furthermore, traders will be able to consider how the price of cryptocurrencies will likely change in the future.

Futures contracts let you take advantage of price movements. Regardless of the price of the cryptocurrency, you can participate in its movement through futures contracts. Therefore, you can speculate on the price of the underlying asset, rather than purchasing it.

Purchasing a futures contract when the price of an asset increases is a sensible strategy while selling it when the price decreases is a sensible strategy. A prediction can result in profit or loss. 

Binance Futures is one of the exchanges where crypto futures are traded. As with spot exchanges, derivative exchanges operate similarly. 

The complexity of derivative exchanges makes them different from spot exchanges such as insurance funds, which have basic risk management mechanisms. 

What is Crypto Spot Trading?

Bitcoin and ethereum are among the digital assets that can be purchased and sold within seconds through spot cryptocurrency trading. It is a crypto-currency that can be transferred directly between participants on the market (buyers and sellers). Direct ownership of cryptocurrencies and stake participation benefits are among the advantages of the spot market.

Users can trade fiat money for cryptocurrencies on exchanges like Binance as well as for cryptocurrencies for fiat money. Buyers and sellers connect through spot exchanges. A trade will become possible once an offer and bid have been matched. With spot exchanges, you can trade cryptocurrency around the clock, unlike other forms of crypto trading. 

Here’s an example.

USD (in fiat) is the currency that can be used to purchase Bitcoin on the spot market. Using this scenario, an order for BTC/USD will be placed on a crypto exchange spot market at the specified price and quantity. After you make a payment, you can store Bitcoins in spot wallets, so you can hold on to them until their value rises. It may be better to convert it into another altcoin that appreciates sooner rather than later. 

In the event you hold your cryptos on the spot market, they can increase in value over time.

Trading Crypto Spot and Crypto Futures: Differences

1. Leverage 

 Futures trading is highly capital-efficient because of the leverage involved. In exchange for 1 BTC, one can open a position for a fraction of the market value. Spot trading, however, does not offer leverage. If you purchased 1 bitcoin on the spot market, it would cost you thousands of dollars. Imagine that USDT 10,000 is at your disposal. USDT 10,000 is all that was needed to purchase Bitcoin in this case.

2. Flexibility to Long or Short

 The value of your cryptocurrency may increase over time as you hold it on the spot market. Futures contracts, on the other hand, provide the ability to profit from price increases and declines. Bitcoin’s downtrend still offers opportunities to make money, even if the price goes even lower. Miners can also use futures contracts to manage risks, in addition to protecting investors from price volatility.

3. Liquidity 

 There are trillions of dollars in monthly volume in cryptocurrency futures markets, which provide deep liquidity. Bitcoin futures trading volume is about two trillion dollars higher than spot Bitcoin trading volume on a monthly average. Since the market’s liquidity is strong, it can operate quickly and efficiently, enhancing price discovery.

4. Futures vs. Spot prices 

Cryptocurrency prices are determined by supply and demand, a market mechanism involving buyers and sellers. As the spot price is the prevailing price, it applies to all transactions on the spot market. 

A futures price is determined by prevailing spot prices plus the futures premium. Futures premiums can be positive or negative. The futures price rises when the premium exceeds the spot price; on the other hand, the futures price decreases when the premium is negative.

 Changing supply and demand may affect future premiums.

Futures contracts: How to trade them?

It is possible to make significant profits by predicting whether to place a long or short order. Futures can now be sold short on the market since they have been added to the market.

You may, for instance,

The price of Bitcoin will drop from 10,000 USD to 6,000 USD based on your prediction. Shorten the position and use the corresponding leverage. Dropping prices can lead to profits. The same applies to a long position. Contract trading will experience an increase in profit and risk due to the ten times increase in leverage.

 Maximum leverage of 150x is available on BTC, which supports daily BTC and ETH trading. BTC supports nine major cryptocurrencies through perpetual contracts. Traders can choose from 10x, 20x, 50x, or 100x leverage on Bitcoin/USDT perpetual contracts, and the minimum order size is 0.01 lot.

Final thoughts

Beginners usually have no problem figuring out and using spot trading. Beginners to cryptocurrency trading will therefore find the platform useful. Besides producing substantial profits, futures trading offers some strategic benefits as well. To avoid extreme losses, you must manage risks when investing in futures. To properly strategize before trading futures, you must conduct due diligence and understand the benefits and risks.