Spot trading is just like buying things normally, exchanging money for goods. If I spend 6000 USDT to buy one Bitcoin, then I genuinely own this Bitcoin and can transfer it to my wallet or give it to others.
The advantage of spot trading is that the coins you buy belong to you, and regardless of price fluctuations, the number of coins you hold will not change. The downside is that you can only profit through rising coin prices. If the coin price drops, you can only sell to cut losses or hold the coins passively.
Key Point: Spot trading can only buy long, profiting from buying low and selling high.
Leveraged trading in the crypto space
Leveraged trading is a type of spot trading that requires holding a certain amount of coins or USDT to trade through collateralized borrowing.
For example: going long with leverage means you judge this coin will rise, then you can use the collateral of your coins or USDT to borrow more USDT to buy more coins at the current price. Once it rises above the purchase price, you can sell this coin, return the borrowed portion, and the remaining is your profit.
If you short with leverage on a particular coin, and you judge that it will drop, you can mortgage and borrow the coin, sell it at the current price to obtain USDT, and when the price drops, you can buy more coins at a lower price with the USDT you hold. The additional coins you get become your profit; simply repay the borrowed amount and take the profit.
For example, in leveraged trading of BTC/USDT, if you go long, you need to borrow USDT, and if you go short, you need to borrow BTC.
Leverage in trading has an upper limit, with Bitcoin supporting a maximum of 10 times, while other coins may only support up to 5 times.
The leverage in perpetual contracts supports a maximum of 125 times, but is limited by the type of coin.
Bitcoin contract trading
Contracts are an upgrade to leverage, more user-friendly, without the need to borrow and return coins, making operations simple. You can operate as long as you have coins or USDT in your position.
Contracts are divided into two types in terms of time:
One type is perpetual contracts, which means you can hold them for a long time as long as you don't get liquidated.
Another category has time limitations, which are divided into: this week, next week, and quarterly, meaning that the positions will automatically close when the time is up.
Contracts and leverage can be categorized into coin-to-coin and USDT trading pairs. The former settles profits in coins, which we call coin-based, where profits depend on the increase in coin quantity, while USDT trading pairs settle in USDT.
Trading in coin-based is more profitable than trading in USDT~
Contract spot trading case explanation
Spot trading: If user A invests 200,000 (cost) to buy Bitcoin at a purchase price of 2000 yuan, they can buy 100 BTC. If the price rises to 3000 yuan, they will profit 100,000 yuan.
Profit calculation method: Price difference 1000 × Coin quantity 100 = 100000 Cost 200000 Profit rate 50%
Contract trading: You can open a long position of 100 bitcoins (full margin mode), with 5x leverage requiring only 20 BTC as margin, approximately 40,000 yuan (cost), allowing for a profit of 100 bitcoins. If sold when the price rises to 3000 yuan, it can also yield a profit of 100,000 yuan.
Profit calculation method: Price difference 1000 × Coin quantity 100 = 100000 Cost 40000 Profit rate 250% (Note! This method also carries the same risk)
It is clear that the benefits of contract trading are significant; both spot trading and contract trading yield the same profit of 100,000 yuan. However, contract trading saves a large part of the capital that can be freely allocated. In other words, it achieves the investment and profit of 200,000 yuan in spot trading with only 40,000 yuan, significantly increasing the profit rate, but the risks are the same!!!
If the price drops from 2000 yuan to 1500 yuan, assuming that contract trading has additional margin requirements without liquidation, the loss is 50,000 yuan. To prevent liquidation, user A invests 50,000 yuan, thus user A has 150,000 yuan available for use, which is equivalent to obtaining the same price return with less capital. If 150,000 yuan is used to purchase financial products, it can generate more than 20,000 yuan in interest. The profitability advantage of contract trading can be imagined.
Of course, contract trading also carries certain risks; profits are 5 times, and losses are also 5 times. If losses exceed the deposit, all will be forcibly liquidated, which is called "liquidation". Therefore, it is essential to set stop-loss and take-profit orders and to timely supplement margins to prevent liquidation.
What is the difference between leverage and contracts?
[1]. Different operating methods: Leverage is achieved through borrowing coins from the platform to over-allocate assets in the spot market, which includes borrowing fees + trading fees. Contracts use a delivery contract model, meaning that the leverage multiple of the product can be chosen before trading, removing the need to borrow coins for leverage in the spot market.
[2]. Different definitions: Leveraged trading involves using a small amount of capital to make investments several times the original amount, hoping to obtain returns that are multiples of the fluctuations of the underlying asset, or to incur losses. A contract is an agreement where the buyer agrees to receive a specific asset at a particular price after a specified time, and the seller agrees to deliver a specific asset at that price after a specified time.
[3]. Different rules: Leveraged trading involves investors using their own funds as collateral to obtain financing from banks or brokers to amplify foreign exchange trading, thus increasing the investor's trading funds. Futures contracts are standardized contracts designed by exchanges and approved by national regulatory agencies. Holders of futures contracts can deliver the underlying asset or conduct hedging transactions to fulfill or relieve contract obligations.
[4]. Different characteristics: Leveraged trading has 24-hour trading, global markets, fewer trading varieties, flexible risk control, two-way trading, flexible operations, high leverage ratios, low trading costs, and low entry barriers. The characteristics of futures contracts are high returns with small investments, two-way trading, no need to worry about performance issues, market transparency, a well-organized system, and high efficiency.
In contract trading, if leverage is to be used, a performance guarantee (collateral) must be deposited, which is also known as the trading margin. The trading margin generally accounts for a small part of the total contract value, allowing traders to control contracts worth a significant amount with relatively small virtual funds. This brings great flexibility and high trading efficiency to traders.
