Which is better, leverage or contracts?
In leverage trading, the transaction involves spot currencies, and the exchange lends you the currency borrowed from other traders within the exchange, with interest; you are still trading actual spot digital currencies, and the exchange simply lends you at high interest while providing low interest to those who provide the currencies, capturing the difference.
In contract trading, however, the contracts are merely some intangible agreements drafted by the exchange, without actual digital currencies as support, relying mainly on the exchange's influence and credibility. Therefore, contracts do not require borrowing interest; you only need to pay transaction fees, making it a derivative of spot trading.
In blockchain exchanges, leverage trading is assistive, while contract trading is proactive. It is obvious that in blockchain exchanges, when you want to engage in leverage trading, you need to borrow the cryptocurrency you want within the exchange, and then you can make money (a little voice ps: there is also a great possibility of losing money).
Binance download registration address:https://www.binance.com/join?ref=565010509
Contract trading is an agreement drafted by the exchange itself; before delivery, even if you do not have the specified cryptocurrency, as long as you fulfill the contract's requirements on the delivery date, you can proceed.
Thus, we can understand that contracts are similar to futures contracts in domestic futures exchanges, while leverage has more trading rules that you need to understand and also entails higher leverage; therefore, leverage is certainly riskier than contracts! Moreover, for domestic traders, leverage is also inaccessible, mostly belonging to platforms not recognized by domestic regulatory bodies, so caution is needed in trading choices!
The difference between leverage and contracts:
Leverage trading and contract trading both utilize small funds for excessive investments, amplifying returns while also needing to bear amplified risks. Both can conduct two-way trading, allowing users to go long when bullish and short when bearish. Although they seem to operate similarly, there are essential differences between the two.
1. The markets of the two are different. Leverage trading is an extension of spot trading, existing in the spot market; while contract trading requires the establishment of an independent derivatives trading market.
2. The number of cryptocurrencies supported by the two is different. Leverage trading supports many cryptocurrencies, while contract trading usually only supports mainstream coins. For example, in leverage trading for a certain cryptocurrency, it supports 15 cryptocurrencies such as BTC, ETH, BCH, while contract trading only supports BTC and ETH.
3. The leverage multiples of the two are different. Currently, most trading platforms support leverage trading of 1-10 times, such as a certain cryptocurrency supporting 10 times leverage; while contract trading typically supports higher leverage such as 10 times, 20 times, 50 times, 100 times, etc.
4. There are also differences in trading costs between the two. Leverage trading incurs borrowing fees and trading fees, with borrowing fees starting to accumulate when assets are borrowed, generally charged daily; while contract trading typically incurs fees only during buying and selling (or delivery), and perpetual contracts may also incur funding fees. Additionally, leverage trading charges fees based on spot transactions, with rates typically around 0.1%, while contract trading rates usually range from 0.02% to 0.05%.
Through the above comparison, it can be found that leverage and contracts are actually two completely different products. The advantage of leverage lies in supporting more cryptocurrencies, making it more suitable for users with multi-currency needs. The advantage of contracts is that they support higher leverage multiples and do not incur borrowing interest, making them suitable for users who prefer high leverage or long-term positions with low leverage. Users can rationally choose investment tools based on their own needs.
In contrast, contract trading is a trading method based on futures or options contracts. Investors do not directly purchase assets but trade price differentials through contracts. For example, futures contracts allow investors to buy or sell an asset at an agreed price at a future point in time. The flexibility of this method lies in that investors can choose to go long or short, taking advantage of market fluctuations to make profits. For instance, if an investor is optimistic about the rising price of crude oil, they can achieve this by purchasing crude oil futures contracts. If the price of crude oil rises from $70 to $80, the investor can sell at $80 upon the contract's expiration, thus obtaining profits.
When comparing the advantages and disadvantages of leverage trading and contract trading, risk management must be considered first. The high risk of leverage trading is evident. Due to the existence of leverage multiples, even small market fluctuations can lead to significant losses. For example, on a certain well-known trading platform, an investor lost all their invested capital in just a few minutes due to excessive use of leverage. In this regard, contract trading is relatively flexible, allowing investors to effectively control risks by setting stop-loss points. Additionally, the expiration time of contracts provides investors with better risk management tools, allowing them to choose the expiration time based on market conditions.
Secondly, from the perspective of profit potential, leverage trading can achieve higher returns in the short term. Especially in highly volatile markets, appropriate leverage multiples can allow investors to gain substantial returns in a short time. For example, in a recent volatile Ethereum price event, investors using 20 times leverage achieved a 300% return in just 24 hours. While contract trading can also bring substantial returns, it typically requires a longer time to realize, which may not be attractive enough for investors seeking short-term profits.
Furthermore, from the perspective of trading strategy flexibility, contract trading undoubtedly has greater advantages. Investors can choose different types of contracts and strategies based on market conditions, such as using options contracts for hedging or diversifying risks through different contract combinations. This flexibility makes contract trading more adaptable in complex market environments. On the other hand, leverage trading strategies are relatively simple, mainly focusing on buying and selling, lacking more flexibility.
In terms of market liquidity, leverage trading usually has higher liquidity, especially on mainstream trading platforms, where investors can enter and exit the market at any time. However, the liquidity of contract trading depends on the type of contract and the level of market activity. In some obscure contracts, investors may face liquidity shortages, resulting in an inability to close positions or execute trades in a timely manner.
In addition, fees and costs are also important factors for investors to consider when choosing a trading method. Leverage trading typically requires payment of certain interest fees because investors are borrowing funds for trading. In contrast, contract trading may involve relatively high trading fees, especially in cases of frequent trading, where accumulated costs may significantly impact overall returns. Therefore, investors need to comprehensively consider their own financial situation and trading frequency when choosing a trading method.
In terms of trading psychology, leverage trading, due to its high risk, often leads to significant emotional fluctuations for investors, especially during market volatility, where investors may easily experience panic or greed, leading to irrational decisions. In contrast, contract trading is relatively rational, allowing investors to conduct reasoned analysis and decision-making based on market trends and contract expiration times.
In my personal opinion, when choosing between leverage trading and contract trading, investors should comprehensively consider their own risk tolerance, investment goals, and market conditions. If seeking short-term high returns with a strong risk tolerance, leverage trading may be more suitable; while if aiming for long-term stable investment returns, contract trading is a better choice.
In summary, leverage trading and contract trading each have their unique characteristics and applicable scenarios. Investors must analyze their actual situations when choosing a trading method, clarifying their investment goals and risk tolerance. Regardless of which trading method is chosen, reasonable risk management and strategy formulation are key to success. It is hoped that this analysis will help more investors make informed decisions in the complex financial market, achieving wealth appreciation and preservation.
