What is spot trading?
Spot trading is the simplest form of trading in the cryptocurrency market. When you engage in spot trading, you buy or sell cryptocurrencies for immediate delivery. In this case, digital assets are transferred directly between the seller and the buyer upon completion of the transaction, meaning you gain full ownership of the cryptocurrencies you purchased. In other words, you become the actual owner of the digital assets, whether they are Bitcoin, Ethereum, or any other cryptocurrency.
Characteristics of spot trading:
1. Full ownership: When you buy cryptocurrencies in the spot market, you gain real ownership of them. This means you can transfer them, trade them, or hold them in your digital wallets.
2. Immediate delivery: The transaction is executed immediately, with digital assets transferred directly between traders.
3. Taking advantage of long-term gains: The goal of spot trading is often to hold assets for a long time to benefit from increases in value over the long term.
What is futures trading?
In contrast to spot trading, futures trading does not require you to own digital assets directly. Instead, you buy or sell a contract that reflects the future value of the cryptocurrency on a specific date. In other words, you agree with another party to buy or sell the cryptocurrency later at a price agreed upon today. What makes futures trading attractive is the ability to benefit from price movements in both directions, whether they rise or fall.
Characteristics of futures trading:
1. No need to own digital assets: In futures trading, you do not own cryptocurrencies directly. Instead, you own a contract that requires executing the trade at a future date.
2. Taking advantage of price fluctuations: Traders can profit whether cryptocurrency prices rise or fall, by taking long (buy) or short (sell) positions.
3. Hedging: Many traders use futures contracts as a tool to hedge against market volatility, helping them protect their assets in case of significant fluctuations.
The fundamental differences between spot trading and futures trading
1. Ownership
● In spot trading: The trader receives direct ownership of the purchased cryptocurrencies. For example, if you buy 1 Bitcoin in the spot market, you already own it and can transfer it to your personal wallet.
● In futures trading: The trader does not actually own cryptocurrencies. Instead, they own a contract that reflects the future value of the currency and executes the trade at a later date.
2. Use of leverage
● In spot trading: Leverage is not used, which means you need to pay the full amount for the cryptocurrency you wish to buy. If you want to buy 1 Bitcoin, for example, you must pay the full value of the Bitcoin.
● In futures trading: Traders can use leverage, allowing them to open positions at less than the actual cost of the asset. For example, using a leverage of 1:100, you can buy a contract for 1 Bitcoin by putting down a small amount as collateral.
3. Flexibility in long and short selling
● In spot trading: Profit depends solely on the increase in the value of cryptocurrencies. If the value of Bitcoin rises after purchase, you can sell it for a profit.
● In futures trading: Traders can profit whether prices rise or fall. By taking long positions when expecting prices to rise or short positions when expecting prices to fall, traders can capitalize on market fluctuations.
4. Liquidity
● Typically, liquidity in spot markets is lower compared to the futures market. Spot trading relies on the immediate supply and demand for digital assets.
● On the other hand, the futures market provides greater liquidity due to the massive volume of contracts traded daily, allowing for faster and more accurate execution of trades.
5. Pricing
● In spot trading: The price you pay or receive is the current spot price in the market, based on supply and demand at that moment.
● In futures trading: The price depends on the spot price of the asset plus the futures premium, which can be positive or negative depending on the supply and demand for future contracts.