If you have been trading cryptocurrencies for a while now, you would probably come across crypto spot and futures. These might be new to you but if they are very much like those in traditional money markets where there are various types of markets that you can invest into depending largely on your desired returns and your risk appetite levels.
A functional ecosystem
Typically, spots and futures are very important in conventional financial markets. They are platforms that have significant roles to play which is why they could be as crucial when it comes to cryptocurrencies. A spot market is basically the place of trading for commodities, bonds, stocks and currencies that can be delivered instantly. On the other hand, as the name implies, the futures market will have a delayed (usually predetermined) date of delivery in the future.
Getting to the bottom of Crypto Spot Trading
As mentioned, when you get instant delivery of digital assets like Bitcoin and Ethereum during the process of buying and selling, that is the essence of cryptocurrency spot trading. This means that in the process of buying and selling a particular cryptocurrency, the tokens are transferred directly between both parties. This also means that you are the direct owner of the particular token. Hence, you have certain legal rights like voting and such.
Most renowned exchanges out there usually provide facilities for spot trading. As a user of the platform, you can carry out transactions like fiat-to-crypto or crypto-to-crypto respectively. The exchange would typically be the intermediary for buyers and sellers to bid and trade. For instance:
- You use the crypto exchange spot market to find a certain BTC/USD pair.
- You then place a buy order of the price and quantity you want.
- When the pair becomes available, your BTC will be stored in spot wallet. This is where you wait for the price to go up before selling and then raking in the profit.
- This way, you get to earn from the appreciation of the capital.
Getting to the bottom of Crypto Futures Trading
On the other hand, you will be trading contracts of a certain value of the tokens in the futures market. Here, you do not in any way own the token like how you would in spot trading. You only own a contract to buy or sell at a later date. Unlike spot trading where you own the token, you do not have any legal rights. What you get out of this type of trading is that you are protected from market volatility and sudden price changes of the token. In other words, you get a proxy to speculate future prices which could be lower in risk.
- Because you are not buying the asset itself, you can carry out speculation better.
- You buy a futures contract to go long if you speculate the value to go up and vice versa.
- There are derivatives exchanges that provide such facilities like Binance Futures.
So, what does it mean to you?
Generally, the level of risk appetite will determine which type of trading is your style. The futures market tends to give you more leverage because you do not need the amount of money you need to buy. The futures market allows you a better flexibility if you are going for short-term investments. There are times when your funds are locked in the spot market because of price movements. Do take note that price changes in the cryptocurrency market can be very volatile at times which means you need to be cautious, much like every other financial market you put your money into.