4. Differences between Spot and Futures trading

Let’s determine the best kind of trading for you
Written by Olha
Updated 7 months ago

In this article, we’ll consider the features of each type of trading, the existing advantages and risks. We’ll divide the article into four sections:

  • Spot trading;
  • Futures trading;
  • Risks;
  • Advantages

Spot trading. This is the type of trading that has always been recommended for beginners. After all, it’s the simplest and most familiar kind of ‘buying and selling’. You exchange your money for a proportional number of coins and become their owner. You have the right to sell them, transfer them to another user or keep them on your account.

At the same time, Spot is a relatively safe investment, unlike futures trading. You do not risk losing all your investments. The value of coins may fluctuate depending on the phase of the market and the state of the project to which it belongs. In most cases, after a temporary drawdown, the value of the coin is restored or becomes greater than the original one.

Usually, in the spot market, we only have the opportunity to buy or sell at the actual price of the coin. For example, let’s say you bought 10 coins at a cost of $1 each, waited for growth, and sold them for $1.5 each. As a result, your net profit was $5.

In situations where the purchase price was higher than the current one, it is customary to wait for the price to recover. For example, let’s say you bought 10 coins at a cost of $1 each, but over time, the cost dropped to $0.9. If at this moment you decided to sell them, then your loss would be $1.

The exchange removes commissions only at the time of sale or purchase, that is, at the time of the transaction.

But, GT App’s users have more options to make money, even as the price drops. Our spot strategies work in both Long and Short positions.

Therefore, we recommend being active even in a falling market. You only need to analyze the chart of your coin and switch the trading strategy at the right time depending on the direction of the price. 

Futures trading. When trading futures, you do not own the coin. In fact, you are betting on the rise or fall of the price of the coin in the future.

Futures have a number of fundamental differences that allow you to get good profits with small investments.

First, there is the option to use leverage, which multiplies your trading capital. If we talk about the same $10, by setting 5X leverage, you can open a futures contract for $50.

Secondly, you can earn both in a growing market and in a falling one. If according to your assumptions, the price will decrease, you may open a Short trade and earn in the same way as in a growing market.

Risks. Speaking about risks in trading, one thing is always meant – the risk of losing capital. 

Risk-free trading does not exist. But, when comparing Spot and Futures trading, there is a rather tangible difference in the size of potential losses. When choosing one or another type of trading, you must clearly determine the degree of riskiness that you are ready to take.

In the Spot market, the user may incur losses when the value of the coin decreases. But, as we wrote earlier, usually we are talking about a temporary drawdown, which, after waiting, will land you a profit. But while waiting, your assets are frozen.

In futures trading, there is a thing known as Liquidation, while in the Spot market, this doesn’t exist. Liquidation is the closing of your trade due to a complete or almost complete loss of margin. For example, you opened a Long trade by investing your $10 into the trade. If the price direction was chosen incorrectly, and the price began to fall, then at some point the transaction will be forcibly closed and the original $10 will be deducted from the balance.

The speed at which Liquidation approaches depends on the size of the initial margin (the more, the better), and on the size of the leverage (the lower, the better). Liquidation is what every trader should avoid the most.

During such transactions, the trader should be involved in the process as much as possible, tracking the course of events on the chart and sometimes applying their knowledge while making quick adjustments. This causes stress and discomfort for some users.

Advantages. Potentially, both kinds of trading have undeniable benefits, otherwise, the number of market participants wouldn’t have grown so rapidly. 

Spot trading is a great start for beginners and those who prefer relatively risk-free long-term investments. If you do not have the time and desire to constantly monitor charts, this option is definitely for you.

Futures trading is suitable for those who already have some experience in crypto trading. If you want to make a quick profit from each trade, and if your starting balance does not yet have impressive volumes, then opt for futures trading.

As a result, there is not much competition between Spot and Futures trading, due to significant differences. Each type has its users, for one reason or another. Do a little analysis of your capabilities and expectations, and based on them, you can clearly determine what exactly suits you personally.

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