Since blockchain and cryptocurrency have made it possible for NFTs and the Metaverse to become an asset class for an investor’s portfolio, the financial industry has seen a lot of new opportunities! We now have virtual land where we may buy and go to concerts as the new world is migrating to Web3. The realm of cryptocurrency extends beyond trading and looking at investment possibilities. A new ecosystem has emerged as a result of the widespread acceptance of the new asset class!
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 Spot and Futures trading.
Before addressing the distinctions between the two, also known as spot trading versus futures trading, let’s first define cryptocurrency spot trading and cryptocurrency futures trading.
WHAT iS spot trading?
Currency, equities, and other financial instruments are exchanged for immediate delivery on a spot market.
Spot trading entails the real delivery of the coin and instantaneous payment and delivery.
This sort of trading is referred to as Spot Trading. Whenever you visit a cryptocurrency exchange and hit on the buy or sell button and the transaction is finished instantly, i.e., the ownership is transferred, and the payment is made at that same moment.
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. Spot Price is the term used to describe any asset’s current market value.
The ownership of the cryptocurrency is passed to the buyer when it is purchased at the spot price in spot trading, allowing investors to stake the currency and earn interest on it or cast a vote on significant forks.
Advantages of spot trading
- Crypto Spot Trading is simple since transactions are carried out quickly and simply.
- There is just one price involved, the Spot Price (Current Market Price), which is transparent since it is based on supply and demand.
- Because investors trade directly in assets rather than the value produced from them, staking is possible, and interest may be earned.
disadvantages of spot trading
- It might be uncomfortable to hold unprofitable bitcoin assets, and you have to keep them safe.
- There are fewer possibilities to make money in the spot market since leverage costs are substantially greater.
- Exchange wallets containing cryptocurrency assets are vulnerable to hacking, which might result in significant losses for investors.
- Before we get further into trading in cryptocurrency futures, let’s first define derivatives.
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 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 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.
After discussing the definition of derivatives, let’s go on to discuss how to grasp crypto futures trading.
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 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 staking and earning 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 you buy a futures contract, you trade on speculative pricing rather than owning the underlying coin. As a result, since the underlying coin is not owned, there is no financial incentive to staking and earning interest.
In a futures contract, your chance of making a profit or losing money depends on how accurately you estimate whether the price of the cryptocurrency will rise or fall. Therefore, even in a weak market, investors can profit from future contracts. Your prediction will determine whether you take a long or short position.
Advantages of Crypto futures trading
- Leveraging allows for gains that far exceed those of the Spot Market.
- In a bear market, money may be made.
- Risk exposure management may be accomplished with adaptable solutions.
- It goes beyond just buying and selling.
Disadvantages of crypto futures trading
- Due to the volatility of the cryptocurrency market, there is a considerable risk associated since speculative investors might suffer significant losses in a volatile market.
- Since there is no ownership of the underlying coin, investors cannot gain financially by staking and voting.
Crypto spot trading vs. 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 value increases can you profit on the spot market. However, you may take both long and short positions on a futures market, and by 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.
Before using the derivatives platform, make sure to conduct a thorough study and build expertise as a spot trader. However, don’t wait too long or you risk missing out on chances to profit significantly from the derivatives market. In this article, we compared Spot Trading vs. Future Trading and discusses the advantages of each. Share your thoughts with us and let us what you think of the future of cryptocurrency.