Since blockchain technology and cryptocurrencies have made it possible for non-fungible tokens (NFTs), the Metaverse, and a blockchain-based platform, as well as an asset class for an investor’s portfolio, a wide range of new opportunities have emerged in the financial sector.
The new world is heading to Web 3.0, where we now have virtual land to shop and attend concerts at. The crypto realm is not only restricted to trading and researching investing alternatives; it has generated a complete new ecosystem!
In cryptocurrency trading, traders must comprehend the principles of spot trading and futures trading. It may take a lifetime to learn all the different cryptographic concepts and techniques. Spot and futures trading are essential elements of the environment in the cryptocurrency market.
If you are confused about the differences between these two investment instruments, this article will clarify those questions.
Description of Crypto Futures Trading
A contract for a particular cryptocurrency’s value is known as a “crypto future.” Unlike owning actual cryptocurrency, you do not own the underlying cryptocurrency when you purchase a futures contract. Instead, you are the owner of a contract that commits you to buying or selling a particular cryptocurrency at a later time.
A futures contract allows investors to bet on the future price of a cryptocurrency. Investors can choose between long and short positions depending on whether they believe the cryptocurrency’s price will go up or down.
Defining Crypto Spot Trading
The spot market allows you to buy cryptocurrencies such as Bitcoin and Ethereum or trading pairs like APT USDT. In other words, cryptocurrencies are transferred directly between buyers and sellers in a market.
As a result, you have direct ownership of your cryptocurrency assets and can benefit from voting on major forks, staking participation in Proof-of-Stake blockchains, or “staking” coins in masternodes.
How are crypto spot trading and crypto futures trading different?
To make a profitable trade, you must identify the key differences between the spot and futures markets. Once you understand their characteristics, it’s easy to see their benefits and drawbacks.
Leverage
One of the main reasons most traders opt for futures trading is the ability to leverage that they get from it. This trading system allows traders to speculate on the price of cryptos without having to actually buy them.
For example, if you do not have enough money to purchase crypto like terra, you can make a futures contract and position the cost at a later time. This means that when the LUNA 2.0 coin price rises significantly, you can make large profits by putting little money into the trade right now.
Short- and long-term flexibility
Cryptocurrencies can be traded at the spot market, which allows investors to profit from capital appreciation. Futures contracts also allow investors to profit from price movements in either direction.
Bitcoin’s price may decline, but you can still profit from the downturn as prices continue to fall. Futures contracts are perfect for long-term investors and miners because they can be used to hedge against unforeseen risks and high price volatility.
Counterparty Risks
Traders and investors should understand the risks of trading crypto along with trading pairs such as LUNA/USDT and others with the spot market or futures contracts through a market exchange. Minimizing risk and maximizing gains is the goal of every trader or investor.
One type of risk you may encounter is counterparty risk. When you have a contract with someone, it’s possible for that person not to hold up his or her end of the bargain, whether because he or she is unable to meet it or simply refuses to do so.
Liquidity
Liquidity is a key reason why futures trading is more popular than spot trading for many traders. Large enterprises can even take advantage of the liquidity—the ease with which transactions can be made—offered by options. The turnover obtained through this is in millions for such enterprises.
Trading Fees
Trading fees can be a concern when crypto is involved, due to the fact that they tend to accumulate and reduce overall gains. Spot market trading usually has fees around 0.1% to 0.2%. There could also be volume-based fees depending on the total number of buyers and sellers in the market.
Futures contracts usually have a settlement date. When the settlement date is reached, a trader’s position must be closed entirely. If a trader does not close his or her position manually, the system will automatically settle it at the point of reaching the settlement date. And an outstanding position will be subject to a settlement fee.
Futures vs. Spot prices
The value of cryptocurrency is specified by the combined forces of supply and demand in an economic marketplace. The spot price represents the prevailing price for immediate transactions. Futures contracts are priced based on the spot price plus a premium.
The futures price may be higher or lower than the spot price, depending on whether a positive or negative premium exists.
Concluding Thoughts
Spot trading is a good option for beginners because it is easy to understand and intuitive. However, futures trading offers strategic advantages and can help you make more money.
Spot trading and futures trading both have benefits, but they are different. If a friend’s experience with futures trading is positive, that doesn’t mean you’ll have the same experience.
You need to assess your needs and requirements before deciding which kind of trading is right for you. No matter how trustworthy an exchange may be, it can’t guarantee that you won’t be vulnerable to risk.
