What is Crypto Futures Trading?
Crypto futures are contracts that represent the value of a specific cryptocurrency. You do not own the underlying cryptocurrency when you purchase a futures contract. Instead, you own a contract under which you have agreed to buy or sell a specific cryptocurrency at a later date.
What is Crypto Spot Trading?
In the spot market, you buy and sell cryptocurrencies such as Bitcoin and Ethereum for immediate delivery. In other words, cryptocurrencies are directly transferred between market participants (buyers and sellers). In a spot market, you have direct ownership of cryptocurrencies and are entitled to economic benefits such as voting for major forks or staking participation.
Differences Between Crypto Spot Trading and Crypto Futures Trading
1. Leverage - Leverage makes futures trading extremely capital-efficient. With a futures contract, you can open a 1 BTC futures position at a fraction of its market value. Spot trading, on the other hand, does not provide leverage. For example, to purchase 1 BTC in the spot market, you would need thousands of dollars. Assume you only have USDT 10,000 available. You could only afford to buy USDT 10,000 worth of Bitcoin in this case.
2. Flexibility to Long or Short - If you hold cryptocurrencies in the spot market, you may benefit from capital appreciation as the value of your cryptocurrency rises over time. Futures contracts, on the other hand, allow you to profit from short-term price movements in either direction. Even if the price of Bitcoin falls, you can participate in the downtrend and profit as prices continue to drift lower. Futures contracts can also be used to protect against unexpected risks and extreme price volatility, making them ideal for miners and long-term investors.
3. Liquidity - With trillions of dollars in monthly volume, the crypto futures markets provide deep liquidity. For example, the Bitcoin futures market has an average monthly turnover of $2 trillion, surpassing trading volumes in Bitcoin spot markets. Its robust liquidity promotes price discovery and allows traders to transact in the market quickly and efficiently.
4. Futures vs. Spot prices - Cryptocurrency prices are determined by buyers and sellers through an economic process of supply and demand. The spot price is the ruling price for all transactions in the spot market. The futures price, on the other hand, is based on the prevailing spot price plus the futures premium. The futures premium could be either positive or negative. A positive premium indicates that the futures price is higher than the spot price; conversely, a negative premium indicates that the futures price is lower than the spot price. Changes in supply and demand may cause the future premium to fluctuate.