Spot, Margin & Futures: A Crash Course
If you’re a newcomer to crypto, you will at some point have become slightly (or very) confused by the amount of technical jargon you encountered when you first started learning about the industry. Crypto can sometimes feel like its own language; something you have to learn from scratch, without much of a base ‘language’ to measure it against. But remember, crypto was made by the people, for the people, and its language can often derive from traditional financial language that has been used for many many decades.
Fundamental to crypto language are the three trading ‘methods’ — Spot Trading, Margin Trading, and Futures Trading. On the surface, daunting for newcomers — but dig a little deeper, and they’re all very easy to get your head around. Trading them is of course another story, but understanding is the first step to mastering! In this article, we’ll demonstrate what each of them is, and how they differ from one another.
Millions upon millions of crypto traders frequent exchanges like ZB.com every day, from all corners of the globe. In spite of this diversity, traders are all greeted with three options: to spot trade, to margin trade, or to futures trade (without making life too complicated for you, there are technically more options, but don’t mind those for now). Spot Trading is considered to be the ‘simplest’ form of trading, as it lacks the complexity of its Margin and Futures counterparts. Here’s how it works.
Spot Trading involves buying and selling cryptocurrencies at live market prices. The price you buy and sell at is what the valuation is at the time — ‘on the spot’, so to speak. So, if you load up your laptop or mobile, head to a live crypto exchange, see a Bitcoin trading at price X and decide that you want to buy, that’s the price you pay for it.
Same goes for selling too. If you’re currently holding some BTC and you want to offload it quickly, head to a Spot exchange and it will be sold at the live market price. Remember, Spot = the price on the spot.
One of the factors that makes Spot Trading so appealing is its simplicity — there is no requirement to predict the market, you just simply buy and sell at the market price that you see. Transactions are completed almost instantly, so you will have your crypto as soon as you select ‘Confirm’ when completing a purchase or sale. This is something that makes it so appealing to beginner traders — it allows them to learn the ropes of cryptocurrency trading, while keeping things as simple as possible.
Furthermore, while it can sometimes be difficult to predict the direction a market is heading in, Spot Trading can at least alleviate some of this unpredictability by guaranteeing an on the spot price. It won’t of course protect traders from the potential of markets to fall, but there is at least clarity on immediate prices.
Margin Trading is all about two words — leverage, and volatility. If you want to think about how Margin and Spot compare with each other, think about the Spot market, but amplified. I mean, amplified by 100x in some cases.
A ‘Margin’ is considered to be a portion of your total order size. By using a margin to secure a larger position, traders are able to multiply the size of their orders to potentially maximize their profit levels also. Often, margins are taken as a percentage of a total order, as below:
For example, a trader has $1,000, but wants to open a position worth $100,000 — using Margin Trading, they can use their $1,000 as the 1% margin (because 1,000 is 1% of 100,000) to open their $100,000 position. The remaining $99,000 that is secured by the margin is provided by the exchange the transaction takes place on.
Margin Trading is infinitely more risky than Spot Trading because of this ability to leverage. Trades become a lot bigger than what is put forward by the trader themselves, and while profits can be a lot bigger, so can losses. Often, exchanges have a ‘stop’ mechanism that makes positions close before things can get too out of control.
If a market is volatile, you feel the effects a lot more with a Margin position, when compared directly to a Spot position. That’s because your position is so much larger — one big price change is amplified massively.
Margin Trading is for those with good experience in crypto trading. It isn’t for beginners, and suits those who have an understanding of the market they are trading in and reasonable indications about the direction it’s heading in.
Here’s where we take a slight deviation from the usual method. It’s time to look at the Futures contract.
Futures Trading involves the buying and selling of ‘contracts’. Technically, you’re not actually trading cryptocurrencies here — you’re actually trading the value of a contract that guarantees a specific price for a specific crypto, to be settled on a specific date, regardless of live market prices. Rather than heading to a live market and buying and selling at the price you see at the time, the mechanisms are different here.
Remember, in Futures, traders agree to buy and sell the value of something at a predetermined time in the future. The agreement is what forms the content of the ‘contract’. When the date for settlement of the contract arrives, it is settled based on the price agreed. The contract’s value on that day doesn’t come into play.
Now, there is an added element to Futures Trading to consider — Perpetual Futures. With Perpetual Futures, the fundamentals of the trade remain the same, but there is no end date to the contract. Therefore, the contract remains open for as long as the holder wants, and there is no expiry date.
Futures trading is fundamentally different to Spot and Margin trading because of the trading of contracts, and establishing prices to be settled in the future. With Spot and Margin trading, positions blow in the wind of the market, whereas in Futures some kind of security can be established. However, it’s a big gamble, as the price agreed within the contract could deviate significantly from the live market price.
Like Margin trading, Futures is a tool used by experienced traders who tend to hold a fundamental understanding of the markets they are trading in. It’s not something to jump into as a beginner, and requires a solid knowledge base of the industry before tackling.
Pick The Trade That Suits You
It shouldn’t be news to you that all trading carries its own form of risk. This article is purely to demonstrate the trading methods available to crypto enthusiasts, and we always recommend that you only trade what you can afford to lose. We do not advise trading in cryptocurrencies and making investments if you are not in a position of financial stability. Remember, too, that crypto markets are notoriously volatile, and you should always be aware of the latest price movements to ensure you are completely aware of any changes to your portfolio.
With that said, there are many ways to responsibly enjoy the world of Spot, Margin and Futures trading, when backed by a solid understanding of the markets you are looking to trade in. Hopefully, this article provides you with at least some knowledge to take forward into the crypto world, and sets you up for a successful trading experience!
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