What are the differences between crypto spot trading and futures trading? You will come across two specific terms in crypto trading if you follow the crypto space on a regular basis.
These are spot trading and futures trading, wherein both these forms allow the crypto investors and traders to book profits.
However, if you are unaware of these two forms of trading and, in turn, the differences between them, this is the right place to be in.
Typically, in spot trading, you can choose to buy or sell the cryptocurrencies you hold at any point against cash or crypto depending on the trading strategy you follow or the current trends you see.
The main thing is that in crypto spot trading the coins are yours and you can use them in any way you think fit.
However, in futures trading, you actually try your luck in predicting the price movements of a crypto coin.
Whether you will make profits or incur a loss will largely depend on how accurately you can predict the rise or fall in the price of a particular crypto asset.
Crypto Spot Trading vs Futures Trading – The Differences
Apart from this, there are lots of other differences between spot trading and futures trading, right from the characteristics of the two markets to their pros and cons of trading.
In this article you will find everything about these two forms of trading which will enable you to know how one differs from the other.
When you know the major differences between them, it will be easier for you to trade in these two markets.
According to the definition, crypto spot trading is that which entails two parts for all intents and purposes.
First, it involves buying crypto coins and other Altcoins based on a particular trading strategy. Second, it involves waiting for the time when the value of the crypto coins held increases significantly.
On the other hand, futures trading involves speculating the price rise or fall of a crypto asset in the future without buying or selling them literally.
Crypto spot trading is however the most basic form of trading your crypto assets on this marketplace. In fact, this is the fundamental type of investment that you can make.
In spot trading, you can also use the crypto coins, such as Bitcoin, that you hold to purchase other Altcoins if you believe that the value of those particular crypto coins will rise in the future.
Futures trading, on the other hand, is quite different from spot trading in the sense that in this form of trading you actually do not need to own the underlying crypto asset.
In this form of trading you actually benefit from the rise in value of the crypto asset without requiring buying or selling.
Sans the several complexities involved in this form of trading, the basic idea of it is to bet on the price movements of a crypto asset such as Bitcoin.
The process of crypto spot trading is to buy and sell digital assets such as Bitcoin, Ethereum, and others for instant delivery.
In other words, the crypto coins are transferred directly between the buyers and sellers since you will have direct ownership of the coins. This means that you are permitted to enjoy the economic benefits through staking.
On the other hand, the process of crypto futures trading involves buying or selling contracts. These contracts typically represent the value of a particular crypto coin.
When you buy such a futures contract, you own it and not the underlying crypto asset. The contract is an agreement to purchase or sell a particular crypto coin at a future date.
Role of Crypto Exchange
You can conduct crypto-to-crypto as well as fiat-to-crypto transactions over the spot exchanges. The crypto exchange actually acts as an intermediary for the buyers and sellers who can bid for and buy a crypto asset.
The crypto exchange facilitates the trade by actually matching the bid or offer. These exchanges typically are open and operate 7 days a week and 24 hours a day.
This means that you can buy or sell crypto coins any day and any time of the day and hold them in your spot wallet to make a profit from the capital appreciation.
On the other hand, the futures or derivatives exchanges such as Binance Futures smooth the progress of the trading of crypto futures. These exchanges also operate throughout the day just like the crypto spot trading exchanges.
However, these futures exchanges have a proper risk management mechanism in place that provides proper protection to funds via insurance due to the complexity of the futures products.
Both the markets of crypto futures and spot trading are vital in the crypto ecosystems as well as for conventional financial assets playing an important role in both forms of crypto trading.
Ideally, in a spot market different crypto coins are settled and exchanged immediately just like other currencies, commodities, stocks, and bonds.
On the other hand, in a futures market the delivery of the underlying asset or assets in the futures contracts are facilitated only on a future date that is predetermined and mentioned in the contract.
The value of Bitcoin in this market actually determines the speculative price of the futures, swaps, perpetual contracts, and options.
The futures market is quite attractive to the crypto investors because it offers high leverage which, in turn, helps them to make their moves highly capital efficient.
If you have a futures contract you can open a position at quite a low cost by using high leverage. The higher the leverage, the fewer amounts you will need to spend to open your position. This means that you can buy more coins with your available money in hand.
On the other hand, in a spot market you will need to spend thousands of dollars to buy one Bitcoin, and the amount may vary depending on the existing market rate.
This is because spot trading does not offer any leverage. Therefore, you will be able to buy only that many coins that you can afford with the available capital in your hands.
In spot trading, you can make profits only when the prices of the crypto coins go up. This is because the spot market does not offer the traders any flexibility to go long or short.
The worst part of this is that you will not be able to make any money or profit when the market is making a bear run.
In contrast, you can make a substantial amount of profit even from a price movement in the short term in the futures market. This is irrespective of the direction of the price movement.
This is because, even when the price of the crypto coins falls, you can take part in the descending move and buy and sell along with the momentum.
This will allow you as a trader to build up sophisticated crypto trading strategies. These include short-selling, pairs trading, arbitrage, and others.
When it comes to liquidity, the futures market offers it much more and deeper than spot trading. In fact, it is trillions of dollars if you consider the monthly volume of both.
For instance, the Bitcoin futures market has an average monthly turnover of nearly 2 trillion dollars. Since the futures market offers more liquidity and trading volume, the risk associated with crypto trading is much more reduced.
It will offer less slippage even if you dare to take the other side of a particular position.
On the other hand, the Bitcoin trading volume in the spot market is far too less robust and too low in amount as well.
Therefore, in a spot trading market you will not get the benefits of price discovery and it will not allow you to make your transaction efficiently and quickly.
The prices of the crypto assets in the spot trading market are the one that is currently ruling. This is called the spot price and it is applicable to all spot transactions.
This spot price is however determined by the buyers and sellers based on the main principle of economics – demand and supply.
On the other hand, the prices of futures are based on the current spot price as well as the cost of carry for the duration of the interim prior to delivery.
The basic relationship here is the cost of carry and it can be a positive or a negative number. If this basis is positive, the futures price is higher than the spot price of the crypto asset and vice versa.
The most significant aspect of the basis is that it may vary due to alteration in the supply and demand of the crypto asset. And, this basis will go to zero eventually when it reaches the expiration date due to the forces of arbitrage.
The most significant benefit of spot trading is that you own a specific amount of crypto coins physically in your spot trading wallet.
Other than that, another positive aspect is that you can trade with real assets. These two positive aspects typically give the crypto traders a superior sense of security as well as a much simpler way to make an investment.
On the other hand, one of the most significant advantages of trading in the futures market is that the chances of making a substantial profit is much higher here than in a spot market, especially when you trade crypto futures with leverage.
Apart from that, the futures give the crypto investors an ability to use more flexible strategies while trading such as hedging against price movements of other crypto assets, diversifying as well as going short or long.
The disadvantage of spot trading is that the market charges a higher fee from those traders who want to use leverage.
Also, the level of leverage offered by the spot market is quite low because there is a limited supply of crypto coins in the lending pools.
Apart from that, the investors need to set up a digital wallet first with the crypto exchanges and online platforms in order to trade crypto coins in this market.
In contrast, the most significant downside of the futures market and trading on the other hand is that you do not get the ownership of the underlying crypto coins in the contract.
And secondly, the traders in this market may lose big due to incorrect price speculations. This risk of being liquidated is enhanced even more because the market offers high leverage.
Which is Better – Crypto Spot Trading and Futures Trading?
Both crypto spot trading and futures trading are good to go for though both have their unique characteristics, pros, and cons.
This makes it quite difficult to say which is better among the two.
However, considering both the market conditions, you should ideally choose the better one to trade in depending on your trading style, needs, and preferences.
Whether you would prefer spot trading or futures trading is entirely a matter of your personal choice and philosophy.
Usually, most of the traders who are new to the crypto landscape go for spot trading because it is very intuitive and easy to understand.
However, there are a few things that you should keep in mind before you choose crypto spot trading.
Since you need to set up a digital wallet first for crypto spot trading, it can cause some difficulty for those investors who are not very familiar with the crypto landscape.
Apart from that, this also causes a few security concerns among the crypto traders and investors because there are quite a few online crypto exchanges that have experienced issues like app freezing, technical errors, and hacking.
All these increase the potential risks of leaving your crypto coins in the exchange spot wallet because you may not be able to access your coins when the spot market is highly active.
On the other hand, futures trading is much more favored in the crypto space and people are far more interested in it. There are several good reasons for it such as:
- It offers more liquidity and flexibility in trading allowing the traders to go short or long very easily.
- The market conditions and its features allow the traders to manage the risks involved in crypto trading much more efficiently.
- The traders can also make a transaction at a much lower cost than spot trading by putting in far less capital which, in turn, maximizes profits.
However, in order to make futures trading more lucrative, you will need to have proper knowledge about the product as well as the risk management mechanisms.
This will enable you to avoid incurring huge losses. This means that you will need to plan well to strategize your trades as also do your due diligence before starting trading futures.
This will help you to understand the risks as well as the benefits of crypto futures trading.
There are many positives and setbacks in both these markets but futures trading is for the more experienced traders.
It allows the traders to access specific and distinct product lines.
These can be USD-margined that supports delivery and perpetual contracts settled in dollar value or coin-margined that supports settling the futures contracts in crypto coins.
Futures trading allow more diversity and are also funded by a diverse selection of marginable assets apart from allowing the traders to maximize their returns. However, for that you will need to:
- Find the right crypto exchange for you that offers a wide range of crypto derivatives and
- Consider contract diversification by using different types of futures contracts depending on whether you are an active trader or a long-term position trader.
The large number of traders in a futures market offers more liquidity and makes it more profitable but at the same time you should keep in mind that you will not have any voting or staking benefits since you will not own the crypto coins.
In fact, you should use crypto futures trading as only a proxy tool to speculate on the price movements of a particular crypto coin.
Offering price volatility is another distinctive aspect of futures trading which further enhances your chances of making more profits on your investment irrespective of the rise or fall in the price of the crypto assets.
You can participate in any market conditions with ease either by going long if you expect a rise in price of the underlying crypto asset in the future or by going short and selling them off if you anticipate a fall in the prices.
It is your prediction that will play a significant role in determining the outcome in this case.
Most importantly, the futures contract may be much cheaper in comparison to the price of the asset which is another good reason you should start speculating in crypto futures.
The mechanics of crypto futures trading involves two parties – the buyer and the seller.
Each of them agrees to settle their obligations according to the contract via an exchange of cash in the future and the value depends on the changes in prices of the underlying crypto asset.
The most commonly traded and popular crypto derivative is the perpetual Bitcoin futures contracts.
These are contracts that come at a price that is equal to the price of the underlying asset, Bitcoin.
Here, a credit is guaranteed by the crypto exchange and there is also a daily settling of profits and losses.
In spot trading, you will have to trade the crypto coins physically.
In this process one currency is exchanged immediately for another and all the relevant info regarding the transaction is stored in the blockchain of the cryptocurrency permanently.
And, mind you, this may be difficult at times due to:
- Lower liquidity of the spot market
- Lower trading volume of crypto assets
- Lower profitability and
- Higher bid-ask spreads of each trade.
Also, the borrowing cost is quite high in the spot market which itself offers very low or no leverage.
In the end it can be said that though both forms of crypto trading, spot or futures, have similar financial effects, the transactions with futures trading is much more cost effective.
Futures trading come with a lot of possibilities for the speculators and also have the fastest execution speeds.
It also provides a high leverage that can go as high as up to 50:1. This means that in order to enter a trade you will need a margin which is 1/50th of the size of the trade.
The central clearing facility of the crypto exchange provides adequate protection to your assets against any counterparty risks.
All these facts and features of crypto futures trading make it much more advantageous than spot trading for the traders.
In fact, it is also very useful for the crypto miners and long-term holders since it protects their crypto portfolios from any unforeseen risks.
There is no doubt that both spot trading and futures trading in crypto offer a lot of opportunity to the traders to make profits, but it is important to know the differences between them in order to become a seasoned trader.