Hello everyone, I am Wenbo. Today, I will discuss spot contracts with you.
In light of the issues many cryptocurrency friends have reported, such as not understanding what a contract is, the differences from spot trading, whether added leverage poses significant risks, hearing about the high risks of contracts, and being hesitant to engage in contracts after hearing about many liquidation events, I would like to explain this uniformly today, hoping everyone can have a basic understanding of contracts and wishing you good luck.
This article is mainly aimed at newcomers who have just joined the cryptocurrency circle; experienced users can skip it.
Differences between spot and contract
Spot: Spot trading is similar to stocks. You can only bet on rising prices, not falling. It is a non-leverage trading; it means you invest whatever funds you have without any leverage. If the market rises, you make money; if it falls, you lose money. For example, if you buy a long position in spot BTC at 4000 points, even if the market drops to 10, as long as you hold on, it means your assets are still there. This means that as long as you don’t close the position, you may break even; it is just a matter of time. It depends on whether you can endure it. After waiting three to five years, if the market goes up again, even returning to 4000, you will not lose a cent when you exit. To put it simply, as long as you hold on after buying in, your assets won't go to zero. It is just a matter of time and whether you can endure it.
Contract: A contract is similar to a futures contract. You can bet on both rises and falls, and it has a certain leverage nature. If someone does not understand leverage, let me give you an example: If you only have 1000 yuan, but you are very optimistic about a product and believe it will rise, wanting to earn from the appreciation of this product, but your funds are insufficient. The fundamental difference between contracts and spot trading lies here; you can buy and sell the rises and falls of high-value products with very little capital, but the product does not belong to you; you own the rights to the product's price movements. It is similar in nature to futures but does not have any delay, as it is real-time trading, making it an independent trading model.
I believe the biggest difference between contracts and spot trading is the difference in trading mechanisms. Compared to spot trading, the trading mechanism of contracts is a leverage margin two-way trading mechanism. Leverage amplifies your profits and losses by multiples. Margin is using a part of the funds in your account as collateral to trade amounts you may not even be able to trade.
And two-way trading is easier to understand; you can either buy long or sell short. The key factor here is leverage, which many friends say makes contracts riskier than spot trading. Leverage amplifies your profits and losses geometrically, which requires stricter risk control from many investors. In my personal view, the risk itself is not the leverage but lies in the investor's understanding and control of risk.
Spot and contract each have their advantages
Advantages of spot trading:
1. Buying spot means the goods belong to you; you buy as much as you have money for, and even if the price falls significantly, the goods are still yours. When the market rebounds later, you still make a profit.
2. As long as the value of the goods still exists, everyone still recognizes it, and even more and more people are recognizing it, although how long it takes is uncertain, but it can still be expected in the future.
3. For cryptocurrency friends with a low risk appetite, spot trading does not have high technical requirements because you focus on its future appreciation potential without having to pay close attention to price fluctuations (it should be noted that there are also coins that can go to zero, so even spot trading carries risks).
Advantages of contracts:
1. Two-way trading allows for both long and short positions; having one more direction means one more choice, and having more choices means more opportunities to profit. Even placing an order with your eyes closed gives you a 50% chance of making a profit;
2. Hedging (also called risk hedging), for example, if you have 100,000 yuan and buy all spot at a price of 10,000, you can buy 10. If the market price drops by 10%, you lose 10,000 yuan. But if you use 50,000 yuan to buy 5 spots and then use 5,000 yuan margin to open 10 times leverage to short a contract worth 50,000 yuan, when the market price drops by 10%, the spot loses 5,000 yuan, and the contract gains 5,000 yuan, perfectly offsetting to neither gain nor lose, this is hedging.
3. Ignoring bull and bear markets, whether in a booming bull market or a plunging bear market, there is no impact on contracts as long as there is enough room for the market to fluctuate up and down, there are opportunities for profit.
4. Opportunities for sudden wealth, because leverage brings the attribute of making small bets yield large returns. Theoretically, you can use low costs to gain profits of dozens or even hundreds of times. In a bear market, it is no longer possible to find cryptocurrencies that can yield such returns. The previous chaos has become history, and only the contract market offers this opportunity, which is why the global contract market has such a large trading volume.
Summary:
In any market, risks exist; even money in the bank faces the risk of inflation. And where there is risk, there is reward. Because the relationship is that the greater the risk, the greater the potential reward, more people are drawn to higher-risk environments, as the opportunities are countless. For those looking to find wealth on this broad road full of opportunities, I can only say eight words: proceed steadily and cautiously.
I believe that investors who have read this article should have a comprehensive understanding of the related content. Although both trading methods can yield profits, investors tend to prefer the more lucrative contract trading. It is important to note that while contract trading can result in high returns, it also carries high risks, and even experienced investors can fall victim, so beginners are still advised not to choose cryptocurrency contract trading; protecting your asset security is the most important.
