Choosing a successful earning tactic in cryptocurrency is only possible with knowledge. It will be useful for a beginner trader to learn about the differences between futures and spot trading. I will explain the features of both markets, their advantages and disadvantages.
What is the spot market?
Trading cryptocurrency on the spot market involves buying or selling a coin with immediate transfer of the asset. The transaction is carried out directly between asset owners. For example, if you want to buy bitcoin for dollars, you simply need to find a seller willing to sell the coin for dollars and proceed with the transaction, which is facilitated by the exchange.
Advantages:
Price transparency. Unlike the spot market, futures prices are determined by many factors.
Simplicity of transactions. Clear transaction conditions lower the entry threshold for market participants, making trading understandable for beginners.
Easy entry and exit from trades. If you are not opening short-term positions, there is no need to constantly check the available amount. You sell exactly what you have.
Disadvantages:
Instability of certain assets and trading participants. This increases risks and forces a more careful selection of behavior strategies.
Lower profit. Unlike futures, spot cryptocurrency yields lower income.
What is the futures market?
A futures contract is an agreement that reflects the price of an underlying cryptocurrency and the date of the transaction. By purchasing such a contract, you become the owner of the contract itself, not the asset, and you are obligated to fulfill its terms later. This means that the coin will be bought or sold at a pre-determined price on an agreed-upon date as per the contract. Such speculation is conducted in an attempt to reduce volatility, with participants betting on the movement of cryptocurrency value.
Advantages:
Low initial investments. You can start trading with a minimal starting capital.
Low commission. Unlike spot trading, futures trading is conducted with low commissions.
Larger leverage. Leverage refers to a broker's loan to execute a trade.
Disadvantages:
High leverage. Oddly enough, this is both an advantage and a disadvantage at the same time. Since the trader incurs daily margin fees, if one asset drops significantly in price, the risk of losing funds increases.
Complexity of analysis. A trader must be able to predict and possess analytical skills, so the tactic cannot be considered suitable for beginners.
Difference between spot and futures trading
There are several differences between spot and futures. Here’s what is important to know about them:
Leverage. Unlike spot trading, futures are traded with leverage, which increases the efficiency of the entire capital. Using a futures contract, one can open a position for 1 bitcoin using only part of its value. This is not possible in the spot market; for example, if you only have $1000, you can buy a portion of a bitcoin equivalent to that amount, rather than a whole coin.
Liquidity. The difference between futures and spot trading lies in the higher liquidity. This improves the processes of value formation and helps traders close positions more quickly and profitably.
Prices. The difference between spot and futures also lies in the asset's price. The spot market price is the basis for all transactions. The futures price is formed from the underlying spot price and the premium on the contract. The premium can be positive or negative. A positive premium indicates that the futures market price is higher than the spot price, and vice versa.
Flexibility. Spot and futures differ in flexibility when opening short-term and long-term positions. If you hold cryptocurrency after buying it on the spot market, you can later profit from its price increase. Futures allow for profit from short-term trades.
To succeed in trading on the exchange, it is not enough to understand the difference between futures and spot trading. It is important to understand all aspects of the cryptocurrency market, learn to conduct detailed analysis, and build a behavioral strategy.
