What are the differences between crypto margin trading and futures trading? The thought of trading crypto with margin may have come to your mind now that you are into trading cryptocurrencies for a long time and have gained significant experience through spot trading and futures trading.
It is true that trading crypto coins with margin will offer you quite an interactive experience and provide you with a successful source of income over time but you will need to strategically execute your plans for it.
Therefore, it is important for you to know the differences between crypto margin trading and futures trading to make the right choice for you.
If you are not aware of it till now, do not fret because you are at the right place.
This article will let you know about the major and not-so-major differences between these two trading styles and help you eventually to make the best choice that will suit your trading style and needs.
Typically, in margin trading, you will need to transfer some funds to your margin account and depending on that you can use leverage.
However, this leverage is quite low in terms of futures trading, often as low as up to 25 times considering the BTC/USDT pair.
In futures trading, you can however buy or sell any type of contract without needing to own an asset.
Likewise, there are several differences between these trading styles which this article will tell you about.
Crypto Margin Trading vs Futures Trading – The Differences
As such there are different forms of trading crypto coins and two of the popular forms are margin trading and futures trading on an exchange.
These two forms of trading vary in different aspects. These differences between margin trading and futures trading may look complicated sometimes but actually, it isn’t.
It is these differences that you should know because it is this knowledge that will ensure that you create and follow the right trading strategy according to the form chosen.
It will help you to minimize the inherent risks and make higher profits. Here are all the differences enlisted for you.
The key aspect of margin trading is that it will offer you a chance to trade with some of the most exotic pairs that may include crypto coins such as BTC and ETH.
All you have to do in this form of trade is speculate on the comparative performance of the two crypto coins in the pair instead of buying or selling them.
Therefore, if you are ready to take on the risks involved in it, you can borrow funds to open up crypto positions. You will therefore have more capital in your hand to leverage your position and make higher profits due to bigger trading results.
On the other hand, when you buy futures contracts you will automatically enter into a binding agreement. You will need to buy or sell the underlying asset represented in the contract at a price in the future that is already determined.
Users involved in trading futures can also participate by being long or short on their futures contracts. Usually, you will find different futures contracts based on different delivery dates as well as quarterly or perpetual contracts.
Crypto margin trading is much similar to spot trading because it involves direct trading of a crypto asset. The entire form is based on the speculation of the performance of a particular crypto asset.
However, the significant difference between spot trading and margin trading is that you can use borrowed funds to capitalize on the price movements of the underlying asset in the futures contract further.
On the other hand, in crypto futures trading you deal with buying and selling of contracts that represent the value of a particular crypto asset.
This means that you will not own the underlying crypto coin of the contract, quite unlike margin trading. Instead, you can only exchange a futures contract binding you in an agreement to buy or sell the asset at a future date, which gives it its name.
You can use margin as a hedge against your crypto portfolio and price capitulations. If you use margin as a hedge for your portfolio you will be allowed to open a long or short position.
This actually means that, if you expect the price of the crypto asset to rise, you can go long. In contrast, when you expect the price to fall you can trade to sell short.
On the other hand, as for crypto futures contracts, you can use them as a hedge against adverse movements in the price of the crypto assets and their volatility.
This will help you to gain notable capital exposure which will further allow you to protect your crypto portfolio. This way, while using it as a hedge, you will not need to liquidate or compromise your crypto holdings at a lower price.
Markets to Trade
The markets for margin trading and futures trading are different. When you are involved in crypto margin trading, you can place orders to buy and sell the assets in the spot market.
The orders in margin trade are usually matched with those available in the spot markets. This means that all orders related to margin trading are related to spot orders, but the converse is not always true.
On the other hand, in crypto futures trading, you will need to place orders to buy or sell the contracts in the derivatives market.
In terms of leverage, you will be able to get as much as 3 to 1 and up to 10 to 1 leverage in margin trading depending on the platform and the type of crypto asset you are dealing with.
It also depends on the type of mode you are using while trading such as cross margin mode or isolated margin mode.
On the other hand, in the case of crypto futures trading, the leverage multiplier can be pretty higher than what you will get in margin trading.
When you trade with margin in crypto, you pay the fees for the transaction as well as the prices of crypto coins that are the same as those on the spot market.
On the other hand, the futures trading price is calculated on the basis of the spot price prevailing on the market at that point of time along with the cost of carrying during the interval from placing the order to its delivery.
This is also called the futures basis which may vary due to the variations in demand and supply. This is the main reason for the prices of the futures to deviate temporarily from the spot price.
You can use some of the best and most productive trading pairs in margin trading. It can be exotic trading pairs such as AUD/CHF or standard trading pairs such as BTC/ETH.
In comparison, crypto futures trading does not offer the traders to trade in pairs. Instead, you are allowed to buy contracts based on single and specific crypto coins and currencies such as BUSD, USD, and USDT.
You will incur daily expenses as well as trading fees and interest payments every day while trading with margin. When you consider interest payment, if it is calculated daily it will soon add up to a significant amount especially if you are holding a position for a long period.
This is the case even with a perpetual futures contract, but that is on Binance. However, quarterly contracts on Binance as well as others can help you to avoid incurring such heavy expenses on your trades. This makes them the ideal product for those traders who prefer holding for a long period.
You can make margin trades continuously or in perpetuity. This means that there will be no specific date on which a trader can close the trade. It is, for this reason, margin traders need to pay more attention and be more careful.
However, with crypto futures contracts, on the other hand, you must strictly stick to the time frame specified in the contract, more specifically in those quarterly futures contracts.
Crypto margin trading is much more fungible in comparison to futures trading. For example, if you own 100 BTC and hedge it with margin trading by shorting BTC/USD from one exchange to another for a particular price, you can settle it immediately.
If your BTC is literally a short, you can combine it together with your long position and generate more US dollars and then withdraw them.
You can then send these dollars to the former exchange to buy the BTC back. This is ideally the process of arbitrage that can be completed successfully in a day, or even less than a day.
On the other hand, in the case of futures trading, if you short the same number of BTC futures on a particular crypto exchange to hedge your BTC holding on another exchange you can send them over to the former exchange to use them as collateral for your BTC futures short position.
However, you will not be able to settle the position and withdraw the dollars earned immediately. For that, you will need to wait till the end of the contract period when the BTC futures will become fungible with physical and real Bitcoin.
Another significant advantage of margin trading is that you do not need to pay any premium since you can complete an arbitrage cycle in a day between margin BTC and spot BTC.
This means that there will not be any major discrepancies in the price of the crypto assets when your capital is tied for a period of just 24 hours. This also means that there is no chance of losing your money due to the premium.
On the other hand, trading futures involves paying a huge premium. This is because, as said earlier, it may take months to unlock your capital from your future trade. Moreover, there is nothing that can make you trade the futures contracts at the same price as spot trading.
Evaluations and Considerations
When it comes to evaluating and considering the right crypto trading form, you should remember a few specific points.
For crypto margin trading, consider the size that you want to trade, and whether or not you can actually borrow the amount required to make a trade of that particular size.
And, along with that, if you can find the desired amount of funds on a loan, please do consider the kind of interest that you will need to pay on it.
And, as for the delivery aspect, consider whether or not you need a delivery from the other side in reality and the time for which you need to keep your position open.
On the other hand, in futures trading, you should consider the liquidity factor of the futures contracts. Also, take into account whether or not you are paying the premium or getting paid as well as the amount of it.
You will also be better off if you consider the chances of failures in liquidity on the trading platform as well as the expiration date of the futures contracts.
Which is Better – Crypto Margin Trading or Futures Trading?
The answer to this question is: well, it is subjective.
However, in general, most crypto traders go for margin trading rather than futures trading due to the simple reason that futures trading comes with a much bigger amount of risks.
The crypto coins are known to be extremely volatile because the prices of the crypto assets fluctuate much more widely than the traditional commodities.
This drastic rise and fall in the prices of crypto coins make it very difficult for the participants to predict the future price of any coin.
No one wants to play a risky game, especially when money is involved in it and everything in it needs to be done right.
That is why most people prefer margin trading.
However, this does not mean margin trading does not involve any risks but still, the users find it easier to follow because it gives them more control.
They can get involved in this form of crypto trading within a very short time frame and can also sell the assets at a time when the price rises.
This is why it is said that margin trading is typically done in the spot market.
On the other hand, you can go for crypto futures trading if you are experienced in futures contracts.
This is because speculating the price of the crypto asset is not everyone’s cup of tea.
Given the fact that the crypto prices are very volatile, you must be really confident, and also a bit lucky, with your ability.
As said earlier, there are three good reasons that you should go for margin trading with your crypto.
- One, because in this form you are offered exotic pairs to trade with leverage but futures trading involves only one specific crypto asset that underlies a contract
- Two, because this form of crypto trading allows you to put up multiple assets as collateral so that you can borrow higher leverage and allow you to trade with more flexibility while opening your trade and
- Three, you will be able to make the most out of the arbitrage opportunities offered by margin trading due to the volatility of the futures pairs.
Though trading crypto coins with margin will expose you to several different opportunities that may be unavailable to you in other forms of crypto trading, you should be aware of the fact that you should perform it with specific purpose and attention.
It is only then this form of trading cryptocurrencies will be both fun and a profitable venture.
Another unique aspect of margin trading is that it will allow you to invest different assets as collateral so that you can trade with leverage.
And when the funding rates happen to be volatile, you can use margin trading to make the best use of the arbitrage opportunities created in the futures markets.
You can trade in perpetuity in margin trading, which is another significant aspect of it.
This means that you can keep your margin position open as long as you want.
However, you will need to make sure that your account has adequate funds to keep it afloat.
Otherwise, you will need to answer when your trade moves in an unfavorable direction.
This process is called the ‘Margin Call.’ In such a situation, you will need to make a further investment of collateral or margin into your position to prevent your funds from being liquidated.
On the other hand, as mentioned earlier, trading crypto with crypto futures is a form that should be followed by the experienced traders in this field.
Apart from that, while getting involved with this particular form of trading, you should know the ways to eliminate the risks involved in it.
There are several different tools such as stop-orders that are useful to make your trading much more productive.
However, as said earlier, you will not deal directly with a crypto asset while dealing with a futures contract and it is for this particular reason you can make profits even when the market is crashing.
This is due to the volatility factor which you can use at your discretion irrespective of the happenings to the price of that particular asset.
Add to that, another significant aspect that makes crypto futures trading so favored and popular is that it comes with several different protective features that safeguard the lenders, traders, as well as the exchanges on the whole.
For example, the risk management mechanisms in place on some exchanges such as insurance funds will protect the funds and liquidity.
If you choose Binance exchange for crypto margin or futures trading you can use both ‘Cross Margin’ and ‘Isolated Margin’ modes and switch between them.
This will allow you to allocate your funds as collateral either to an isolated position or cross position so that you can control the risks in a better way.
No matter whichever trading option you choose for your crypto, just make sure that you do your research.
Without knowing how exactly the particular form of trading works it will be unwise to throw all your money and expect a big payday and end up losing, of course.
Also, make sure that you do not invest an amount of money that you cannot afford to lose.
One final thing to remember and not before you make your final choice is that you will be allowed to close down your margin hedge in a day but in order to close down your futures position you may have to wait for months at a stretch.
This means that your capital will be locked up all this time.
Now, the question is which among crypto margin trading and futures trading should you choose.
Well, go with that which is most suitable for you and the particular situation.
In addition to that, you should also consider the exchanges involved in the respective trading forms.
These include the reputation of the exchange, the time for which it has been in business for, the profitability factors, and others.
In the end, always consider the funds that you have in hand because that is one of the most important considerations that will influence your final choice between crypto margin trading and futures trading.
And, though both these forms of crypto trading can prove to be outstanding choices that will provide you with great profit potentials, there are risks that you should keep in mind and avoid.
For that, especially if you are new to these forms of trade, you will need to take some time to learn about both these forms and how the different markets function.
You will then know what it feels like when you win or lose, both of which is a possibility in both these forms of crypto trading.
In order to make profits from your trade just as you desire you will need to follow the right strategy and for that you will need to know about the margin and futures trading in detail. This article must have helped you a lot in that matter.