The main point:
In the spot market, traders can buy and sell cryptocurrencies with immediate delivery.
Meanwhile, in the futures market, traders buy and sell derivative contracts that represent the value of certain assets.
Futures trading is one of the preferred options among experienced traders as it can generate profits regardless of market direction.
The spot market offers a variety of digital assets that traders can buy and hold, while the futures market gives traders the opportunity to profit from small price fluctuations in any direction.
Typically, the spot market is where commodities, currencies, stocks, and bonds are traded with instant delivery. In contrast, the futures market completes delivery of the underlying asset and the futures contract at a predetermined future date.
Spot and futures markets are an important ecosystem for traditional financial assets. These markets play an equally important role for cryptocurrencies.
Here, you will understand the key differences between trading in these two markets.
What is Crypto Spot Trading?
Cryptocurrency spot trading is the process of buying and selling digital assets such as Bitcoin and Ethereum with instant delivery. In other words, cryptocurrency is transferred directly between market participants (buyers and sellers). In the spot market, you have direct ownership of the cryptocurrency and are entitled to legal rights such as voting rights for the main fork or participation in staking.
Exchanges like Binance facilitate spot trading activities, allowing users to carry out fiat-to-crypto and crypto-to-crypto transactions. Spot exchanges act as intermediaries for buyers and sellers to place bids and asks on a crypto asset. If the bid or offer is matched, the exchange will facilitate the trade. Spot exchanges operate 24 hours a day / 7 days a week. This means you can buy and sell crypto at any time.
For example, you want to buy Bitcoin using fiat currency (USD) on the spot market. In this scenario, you can enter the crypto exchange's spot market to search for a BTC/USD trading pair, then place a buy order at the desired price and quantity for execution. After completing the transaction, your tokens will be stored in a spot wallet, which is where you can store them until their value increases. Or, you can convert your tokens to buy other altcoins that you believe will increase in value.
When holding cryptocurrency on the spot market, you can potentially benefit from capital appreciation as the value of your cryptocurrency increases over time.
What is Crypto Futures Trading?
In the futures market, you trade contracts that represent the value of a particular cryptocurrency. When you buy a futures contract, you do not own the underlying asset. Instead, you have a contract with an agreement to buy or sell a specific cryptocurrency at a future date. Therefore, ownership of futures contracts does not provide economic benefits like voting and staking.
Crypto futures contracts offer protection against volatility and adverse price movements in the underlying asset. Additionally, Bitcoin Futures are a proxy tool for traders to speculate on the future price of a particular cryptocurrency.
With futures contracts, you can take advantage when price volatility occurs. Regardless of whether prices rise or fall, futures contracts allow you to take part in cryptocurrency movements easily. In other words, you can speculate on cryptocurrency prices without needing to purchase the underlying asset.
If you expect the value of an asset to rise, you will purchase a futures contract to open a long position. If you expect the value of the asset to fall, you will sell to open a short position. Profit or loss will depend on the results of your predictions.
Derivatives exchanges such as Binance Futures facilitate the trading of derivative products such as crypto futures. Just like spot exchanges, derivatives exchanges operate 24/7. The main difference between spot exchanges and derivative exchanges is that derivative exchanges have protection and risk management mechanisms like insurance funds due to the complex nature of the products.
Crypto Futures Trading vs. Crypto Futures Trading Crypto Spot Trading: Understanding the Key Differences
1. Leverage - Traders are attracted to the futures market because of leverage. Leverage makes futures trading very efficient in terms of capital. For example, to buy 1 BTC on the spot market, you would need thousands of dollars - $50,000 based on the prevailing exchange rate in the market. With a futures contract, you can open a BTC futures position at a lower cost. This can only be done with the use of leverage. The higher the leverage, the less funds you need to open a position. In contrast, spot trading does not offer leverage. For example, you only have 5,000 USDT. In this case, you can only afford USDT 5,000 worth of Bitcoin.
2. Flexibility in choosing Long or Short - When you buy Bitcoin on the spot market, you only make a profit if the price rises. However, in bear market conditions, you cannot make a profit. Futures contracts enable you to profit from short-term price movements regardless of price direction. Even if the price of Bitcoin falls, you can participate in the price decline and trade following its momentum. With futures contracts, traders can develop sophisticated trading strategies, for example short-selling, arbitrage, pairs trading, and much more. Apart from that, futures contracts are also used to hedge against the risk of falling prices and protect portfolios from extreme price volatility. Miners and long-term owners often use futures contracts to protect portfolios from unexpected risks.
3. Liquidity - The futures market offers deep liquidity with monthly volumes worth trillions. For example, the Bitcoin futures market generates an average monthly turnover of $2 trillion, far greater than the trading volume of the Bitcoin spot market. Its strong liquidity supports the price discovery process and allows traders to transact in the market quickly and efficiently. Liquid markets are usually associated with less risk because there is always someone willing to take the other side of a given position and traders will experience less slippage.
4. Futures vs. Futures Prices Spot - The price of a cryptocurrency in the spot market is the price applicable to all spot transactions known as the spot price. Buyers and sellers determine the crypto spot price through an economic process, namely supply and demand. In contrast, futures prices are based on the prevailing spot price plus the cost of carry during the time before delivery. The basis is the cost of carry of a futures contract. This base can be a positive or negative number. A positive basis relationship means futures prices are trading higher than spot prices and vice versa. The basis can fluctuate due to changes in supply and demand, but because of the arbitrage mechanism, the basis will be zero on expiration day.
Trade Crypto Futures on Binance
Binance Futures offers a wide range of crypto futures instruments, providing traders and investors with multiple ways to enter the market.
Users can access two ranges of futures products:
USD-Margined Futures Contracts - Supports perpetual and delivery contracts with leverage up to 125x and settled in USDT & BUSD. Learn more about USD-margined contract specifications here.
Coin-Margined Futures Contracts - Supports perpetual and delivery contracts with leverage up to 125x and settled in cryptocurrency. Learn more about Coin-margined contract specifications here.
USD-margined and Coin-margined contracts are aimed at meeting the specific needs of users. These contracts offer flexibility and diversity, allowing users to trade futures contracts funded by a wide selection of tradable assets. These contracts also offer strategic advantages in various market conditions, enabling users to increase returns.
If you plan to trade futures contracts, you should understand the pros and cons of the different types of futures contracts that exist. To get the most out of futures trading, we recommend:
Finding the Right Exchange- Binance Futures offers a complete range of crypto derivatives products, such as perpetual futures, options, leveraged tokens, and quarterly futures.
Contract Diversification - Consider using two types of futures contracts. For traders with long-term positions, trade quarterly coin-margined contracts because they have no funding fees and optimize profits in bull market conditions. For active traders, USD-margined contracts provide the flexibility to trade with one settlement currency across USD-margined futures contracts, eliminating the need to convert to another cryptocurrency.
Closing
Spot trading is easy to understand and intuitive for most beginners. That way, this choice is perfect for users who are new to crypto trading. However, futures trading offers strategic advantages and allows you to increase profits.
Futures trading can be profitable if you have the right understanding and risk management techniques to avoid major losses. Therefore, you must develop a strategy and perform due diligence before trading futures and understand the benefits and risks.
Read these helpful articles for more information on how to add cryptocurrencies to your portfolio:
(Blog) Crypto Futures Trading: What You Need to Know before You Get Started
(Blog) Crypto Futures Risk and Money Management: 5 Things You Can Do to Better Manage Trading Risk
(Support) Binance Futures Product & Features Overview
(Academy)How to Build a Balanced Crypto Portfolio
And many more Binance Futures FAQ topics…
