Spot and Futures trading, what is it and what is the difference between them?
By Yuriy Bishko Updated November 11, 2022
After you have registered on the exchange (link for the Ukrainian site) and got to the main page, you will most likely have a lot of questions and at first glance everything will be complicated. But this is only at first glance, in fact the system is quite simple and in this article we will explain in simple words what a spot is, what futures are, what the difference between them is and what is right for you!
- What is spot trading?
- What is futures trading?
- Spot and futures trading, what's the difference?
- Spot vs Futures?
What is spot trading?
Spot trading is one of the main and basic types of trade. With the help of spot trading you can buy and sell cryptocurrency (Bitcoin, Ethereum, Cardano, etc.). By buying cryptocurrency on the spot market, you are the direct owner and have the full right to dispose of these cryptocurrencies at your own discretion. If you need an example from real life, it is completely identical to buying real estate.
This type of trading is quite good for investors, or long-term position traders. That is, those market participants who open transactions are quite rare.
The screenshot above shows the trading terminals of the ByBit and Binance exchanges. The interface of both programs is quite similar to each other. In order to buy or sell cryptocurrency on the spot market, you need to go to the Trade section.
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What is futures trading?
In the case of futures trading, you are not buying cryptocurrency, but contracts for a particular cryptocurrency. By becoming the owner of the contract, you automatically assume the responsibility to buy or sell cryptocurrency in the future. Your capital on the exchange serves as collateral.
Let’s consider an example. Imagine that you buy Bitcoin contracts for Long (growth) at a price of $50,000 and believe that the price will go up. In this case, you are obliged to fulfill this contract in the future and invest your capital as collateral.
The first scenario – the price goes in your direction (up) and increases by 100%, i.e. up to $100,000. You decide to close the position and fulfill your contract. The system executes the contract, but no longer at the current price, but at the price of your contract, i.e. $50,000. Simply put, you buy Bitcoin for $50,000, which costs $100,000. Now you can sell your Bitcoin for $100,000 and take the difference. In this case, you have earned $+50,000. But this is conditional, the system automatically calculates the position and sends the difference to your account. Your task is just to press the Open and Close position button.
The second scenario – the price doesn’t go in your direction and falls by 50% from $50,000 to $25,000. You decide to close the position, the system automatically executes your contract, but not at the price of $25,000, but at the price of your contract, i.e. at the price of $50,000. As a result, you buy 1 Bitcoin for $50,000, which costs $25,000. In this case, you lose $25,000.
This is the principle on which the futures system works! The big advantage of futures is that you can bet not only on price growth, but also on its fall, and also earn on it.
This type of trading is more suitable for active traders who often open and close trades.
The screenshot above shows the trading terminals of the ByBit and Binance exchanges. To open futures positions, go to the Derivatives or Futures section.
Spot vs Futures, what are the differences, advantages and disadvantages?
Leverage – Futures trading, unlike spot trading, has the additional ability to open leverage. Simply put, it is an opportunity to borrow money from the exchange and open a position with a larger amount, which will actually give you the opportunity to earn more. But if the price does not go in your direction, you can also lose more.
Opportunity to earn on falling prices - with the help of futures trading you can bet that the price will fall and earn on its fall. With the help of spot trading, you earn only if the price of your cryptocurrency has risen in price.
Liquidation - Futures trading, unlike spot trading, has a higher percentage of risk, so if you miscalculate your opportunities, take a position with a large leverage, and the amount of your collateral is not enough, your position may simply be liquidated automatically. In the case of spot trading, you are forever the owner of the number of coins you have bought.
Fee - in the case of spot trading, you pay a one-time fee at the time of purchase. At the same time, if you open a futures position, the system automatically charges a fee for holding the position every 8 hours.
In conclusion, I would like to emphasize that there is no such thing as: "Which is better, futures or spot?". Each type of trade has its own characteristics and is suitable individually for each market participant.