The cryptocurrency market offers multiple asset trading methods. As a beginner, it is crucial to understand the two (2) most common types:
i) Spot Trading
iii) Futures Trading
In this article, we will break down these two (2) trading methods in a beginner-friendly way, helping you understand their key differences and guiding you in determining which method best suits your needs.
What Are Spot Trading, Spot Margin Trading, and Futures Trading?
Spot Trading
Spot trading is similar to buying and selling in the real world. When you engage in spot trading, you buy or sell an actual asset (e.g., Bitcoin or Ethereum) at the current market price. It involves the direct exchange of two (2) assets between a buyer and a seller, granting you immediate ownership of the asset. Here’s what you need to know:
•Immediate Exchange: You receive the actual asset instantly.
•Ownership: You own the asset and can store it in your wallet.
•No Leverage: You trade using your own funds, without leverage.
Futures Trading
Futures are contracts whose value is derived from an underlying asset. When you buy or sell a futures contract, you do not own the actual cryptocurrency. Instead, you enter into an agreement to buy or sell the asset at a predetermined price on a specific date in the future.
In the crypto futures market, you are not necessarily required to buy or sell the underlying asset on the settlement date. Instead, your profit or loss is determined by the difference between the asset’s value when you enter the market and its value on the settlement date or the date you sell the contract.
Biconomy offers various futures contracts, including inverse contracts and USDC futures contracts, with expiration dates ranging from daily to quarterly. Additionally, inverse, USDT, and USDC perpetual contracts do not have expiration dates.
•Leverage: You can hold a larger position with a smaller margin. However, be cautious—using a lower margin to maintain a position increases liquidation risk.
• Expiration Date:
•Futures contracts have a set expiration date—when they expire, you must close the position.
•Perpetual contracts do not have an expiration date—you can hold them indefinitely as long as you meet the margin requirements. However, if margin requirements are not met, you may still be liquidated.
• Speculation & Hedging: Futures can be used for speculation (seeking profit) and hedging (reducing risk).
Comparison: Spot Trading vs. Spot Margin Trading vs. Futures Trading
|
Category |
Spot Trading |
Futures Trading (Perpetual Contracts) |
|---|---|---|
|
Market |
Spot Market |
Perpetual Market |
|
Expiration Date |
Not Applicable |
No expiration date, allowing you to hold positions indefinitely. |
|
Trading Fees |
Spot trading fees |
1. Perpetual contract trading fees 2. Funding fees Unified Trading Accounts (UTA) may incur interest and repayment fees. For details, please visit here. |
|
Leverage |
Not supported. To acquire an asset worth 100 USDT, you must have 100 USDT in your account. |
Leverage allows you to open a position with less capital. For example, if a position requires 100 USDT as an initial margin, you would need 100 USDT without leverage. However, with 10x leverage, you only need 10 USDT to open a position worth 100 USDT. |
|
Maximum Leverage |
Not Applicable |
Varies by trading pair, ranging from 25x to 125x. |
|
Borrowing |
Not supported. |
Standard accounts do not support borrowing. For UTA, users can borrow funds for futures trading. |
|
Collateral |
Not Applicable |
Initial Margin (IM) acts as collateral for the position. IM = Position Value / Leverage |
|
Profit Potential |
You benefit from capital appreciation as the value of your cryptocurrency increases over time. |
Enables you to profit from short-term bidirectional price movements. In addition to the traditional buy low, sell high strategy, you can also short-sell to profit from downtrends. Futures contracts also serve as a hedging tool, protecting against unforeseen risks and extreme price volatility, making them ideal for long-term investors. |
|
Liquidation Risk |
No |
Yes |
|
Liquidation Criteria |
Not Applicable |
For Standard Accounts: Liquidation occurs when the mark price reaches the liquidation price. For UTA: Liquidation occurs when the Maintenance Margin Ratio (MMR%) reaches 100%. |
|
What Happens During Liquidation? |
Not Applicable |
Depending on your margin mode, you may lose part of your invested margin (partial liquidation) or the entire margin to maintain the position. |