In this article, I will differentiate in depth and explain the concepts of Spot/Margin/Future and Option in detail so that you understand what these types of financial instruments mean. .
The cryptocurrency market is a very open and promising financial market, thus attracting many professional and amateur investors. The concepts of Spot-spot, Margin-margin trading, Future-futures contract, and Option-option contract seem familiar to financial people, but for non-professional investors, these financial instruments really give many people a headache.
In this article, we’ll delve into the differences and explain them in detail so you understand what these types of financial instruments mean.
Spot Trading
Spot Trades, also known as spot trading, is understood to include transactions that include the actual trading and exchange of commodities. This is the most common type of transaction in financial trading. Although translated into spot, in some specific markets such as the stock market, the payment date may be 2-3 days later.
For crypto markets, this discovery occurs almost immediately after the order is executed. For example: If you use 1,000 USDT to buy BTC, then once the match is made, you will receive the BTC amount equivalent to 1,000 USDT at the time of match. Now you exchange 1000 USDT for the same amount of BTC.
The cost of executing a spot trade includes transaction fees only. Transaction fees are usually divided into two types: Taker and Maker.
Taker is when you match someone else's order (when you use market, stop market orders). If you use a buy limit order, but the limit price is higher than the market price, the order is still considered a market order, similar to a sell limit order.
Maker means you are the person who places the order, which is executed by another taker. Maker and Taker transaction fees vary depending on the exchange.
Margin trading
In finance, margin is understood as pledging an investor's assets to a broker to guarantee the credit risk held by the investor.
If you have 1,000 USDT in spot trading, you can only buy Bitcoin equivalent to 1,000 USDT. If the price of BTC rises, you will make a profit. On the contrary, if the price of BTC falls, you will lose money, which does not affect the brokerage at all (for the time being, it can be understood that Binance is not only an exchange, but also a trading platform. Broker). If everyone You can only trade your own quantity, and the liquidity and trading volume will not be very high. The general profit of exchanges and brokers is mainly to charge transaction fees from traders and investors. Therefore, the broker will allow investors to hold and trade assets that are greater than the actual value of the investor's possession. The ratio between Holding Volume and Actual Margin is Leverage.
So credit risk here is the investor's ability to pay for the loan he or she borrows from the broker.
Example (1) You only have 1,000 USDT, but want to buy BTC worth 2,000 USDT. You don't use the 1,000 USDT to buy BTC, but you mortgage the 1,000 USDT to borrow 2,000 USDT back. Then use this 2000 USDT to buy BTC.
Diamond, mortgage 1000 USDT and borrow 2000 USDT? ? ?
Novices will definitely ask: What should I do if I borrow 2,000 USDT and the money is lost? The answer is that the concepts of borrowing and consumer loans are very different. It's simple, because the money you borrow can only be used to continue investing and cannot be taken out to do anything. (Yes, the broker lends you the loan so you can use their services and nothing else.)
Continuing with a question that many people will ask, that is, if I use those 2,000 USDT to invest and lose, I only lose 1,000 USDT. Is it too risky for the brokerage to lend me 1,000 USDT after losing 1,000 USDT?
Even if you lose, the broker will not lose money.
Going back to the above example, when you use 1,000 USDT as collateral, borrow 2,000 USDT and buy BTC worth 2,000 USDT. There will be a value of 2000 USDT in the BTC you hold (but this is not your net worth, you must subtract the debt, i.e. borrow 1000 USDT more, so the net worth is only 1000 USDT.)
Assume that the price of BTC drops by 50% and your position is only 1000 USDT. That is, after deducting debt, your net assets are 0 USDT. If the price of BTC continues to fall, your net worth will be negative. The broker who then lends you another 1000 USDT will bear the same loss as you. Therefore, the brokerage will force you to sell the assets at that time (this action is a Margin Call) to recover the 1,000 USDT equivalent of the debt you borrowed. At this point you have lost 1000 USDT and the broker has lost nothing. Alternatively, if you don't want to be forced to liquidate your asset, you'll need to deposit more collateral to secure it.
In fact, brokers don't wait until you lose all your money before sending you a margin call because they also calculate slippage on liquidation (since liquidation is done immediately with market orders, not pending orders to be matched) and Loan fees. Margin call rates are typically in the 95% range
From the above example, you can also imagine how leverage works and what it means. Leveraged trading magnifies profits and losses. If you only buy Spot, you will only lose 30% of the value when the asset price drops by 30%, and when using 2x leverage, you will lose up to 60% of the asset value when the asset price drops by 30%. You can also earn a true 2x profit when prices rise compared to spot trading.
This is just a simple example of using margin to purchase an uptrending asset with non-volatile collateral USDT. In fact, there are many ways to use margin in many market conditions.
First let’s talk about how to execute buy and sell positions,
As shown in example (1), when you expect the BTC price to rise in the future, you will want to use your asset value (1000 USDT) to buy more to maximize profits.
So if you expect the price of BTC to fall and you hold USDT, how to make a profit.
The method is that you mortgage USDT and borrow BTC - remember this time you are borrowing BTC, not USDT, because what you sow, you will have to pay for what you borrow later. Then immediately sell BTC to the market to earn USDT. When the price of BTC drops as expected, you will buy back the BTC you borrowed. Since the price has now dropped, you will need less USDT to buy back the same amount of BTC sold above. The excess USDT is the profit from selling BTC. On the other hand, if BTC rises, then when you repurchase, you need more than USDT to repurchase BTC and return it to the brokerage, so you will lose money.
Second, is the type of collateral.
Still taking example (1), here you use USDT as collateral to trade the BTC/USDT pair. In fact, with many trading pairs, you can fully collateralize assets outside of the trading pair. For example, you could stake ETH to borrow USDT and then buy BTC/USDT. This leads to the concepts of cross margin and isolated margin.
Cross Margin understands that these collaterals can be collateralized against each other. Borrow USDT against ETH but use that USDT to buy BTC, or borrow BTC against ETH and create a sell BTC/USDT position…
Only assets with high liquidity will be included in Binance’s cross margin section, otherwise they will be segregated. That is, you can only mortgage ETH or USDT and borrow ETH or USDT for the ETH/USDT trading pair.
Third, it is the risk ratio.
Depending on your position in each market environment, the risk ratio will change.
An example of case (4) is: mortgage LTC to borrow USDT and use the USDT to purchase BTC. In this case, if the prices of both LTC and BTC rise, the profit will be huge. On the contrary, if the price of BTC falls too much (assuming that LTC does not fall), the Buy Position will lose money. When the position is closed, the position will lost. Collateralized LTC will be sold. Alternatively, if LTC prices fall (but BTC does not), it will cause the collateral value to fall, causing you to have to sell some BTC if you want to maintain your position.
So what should I do if I borrow stablecoins without buying or selling non-stablecoins?
Because in some cases it is possible to arbitrage interest rates between different platforms.
To give a simple example: borrow ETH from Binance, the interest rate is 8%, and then use ETH to mortgage Huobi, the annual return is 50%. Of course, there are other risks that need to be considered when doing loan arbitrage, but the main example is the explanation of borrowing, not buying and selling.
Users need to pay attention to two types of costs when using leverage trading, namely transaction costs and borrowing costs.
Transaction costs are the same as when trading spot trades.
Loan fees will be calculated hourly.
Note that you borrow something and pay for it with it. If you borrow USDT, you must pay the principal and loan fees in USDT, and if you borrow BTC, you pay in BTC.
TradingFutures
Also known as futures contract trading. On Binance, there are two types of contracts: perpetual contracts and term contracts (delivery). Before discussing the differences between the two, you need to understand how this futures market works.
Futures trading is essentially a derivatives market. (What are Derivatives, read here in a fun and entertaining way), which means you still have the same profit and loss as when trading spot, it’s just that you don’t own the physical asset but instead take a position. Your assets will not have as many assets as above, only 1 unit is USDT (for Binance exchange).
Going back to example (1), instead of using 1,000 USDT to buy BTC worth 1,000 USDT and expecting the BTC price to rise by 50% to make a profit of 500 USDT, then you bet on someone else's BTC to rise by 50%, with a pledge of 1,000 USDT. So how do you know your bet that BTC will rise from this price? Positions – Positions in futures trading ensure this.
When you bet 1000 USDT that the BTC price will rise from here, you will have to deposit your stake to open a long position of 1 BTC worth 1000 USDT. If the price of BTC rises, the value of your position increases. You do not need to wait for BTC to rise by 50% as expected before selling. You can sell at any time, or hold it until you want to take out the position, hence the name Eternal Contract.
So who do you sell your position to? It's for those who bet with you at that time.
Example: You bet 1000 USDT that the BTC price will rise from 50000 USDT/BTC, so you open a 1 LONG BTC position, worth 1000 USDT, equivalent to 0.02 BTC. The BTC price then increases to 75000 USDT per BTC and now your position is worth 0.02 x 75000 = 1500 USDT. If you want to close your position, you can sell this position to someone else, betting that BTC will fall to 75,000 USDT. And you get a net profit of 500 USDT when investing 1000 USDT, which is also equivalent to a 50% increase in the BTC price.
Therefore, by buying or selling on Future Trading, you are buying or selling a bet, rather than actually buying or selling BTC. The upper bet is long and the lower bet is short.
These positions are essentially bets, so the broker (in this case Binance) has full control over your positions. That is, you cannot take your long positions on Binance to the FTX exchange for liquidation even if the reference price on both exchanges is the same. This is why a broker will give you the ability to open a larger position than you actually have - you'll encounter the familiar leverage concept above.
With 10x leverage, you can definitely lose 100 USDT on a 1 BTC down position worth 1000 USDT. However, if the price rises by 10%, that is, your position is wrong and results in a loss of 100 USDT, your position will be closed immediately to ensure that your loss does not exceed your position. (Margin Call – familiar?)
When it comes to futures trading, there are a few things many people will want to know about: Leverage, Crossed/Segregated Funds, and Funding Fees
First about leverage:
Since the broker has complete control over your position, they have greater control over risk, allowing them to offer leverage many times greater than margin (up to 100x). Offering more trading capabilities means they will earn more trading fees.
On the other hand, the futures market is just a derivatives market that uses reference information and simulations of the real market, so it is inevitable to be manipulated within a narrow range because basically the actual liquidity level is different from reality.
Assuming you borrow USDT to buy ETH in margin trading, this is almost equivalent to opening a long ETH position in Future Trading, e.g. the same 3x leverage. But overall, long ETH positions in futures trading are riskier because margin trading and futures trading have different liquidity.
If you know a little bit about margin trading, you'll notice that even if you use leverage, you're still participating in the same market - just as liquid as spot trading. If there is a price manipulation plot in leveraged trading, the market maker will face greater liquidity and be more elusive. In the above scenario, even if it is discovered that a large position to buy ETH will be liquidated at 2000 USDT, the risk of the creator driving the ETH price down to that level is significant because:
In order to drive the price down to that level, they need ETH themselves, and there's plenty available, not to mention, but if they don't have that, they need to borrow the money, and if they can't buy it back at a lower price, they'll likely suffer a reverse loss.
They don't know if they can push the price to that level because they don't predict the market. There may be many buyers preventing the price from falling to this level. Then their plan failed too
Therefore, pumps and dumps rarely occur in spot/margin trading. However, in futures trading, when liquidity is small (because it is not trading the asset but betting), the only unit used is USDT, which is easier for market makers with large amounts of capital. Investors' positions can be manipulated on short notice.
To avoid this, brokers usually create another kind of price information: last price and mark price.
In Last Price is the matching price for contract transactions in the futures trading market, while Mark Price is the reference price relative to the Spot/Margin market.
More information about leverage:
You will often see people sharing orders and the leverage part is usually x125, x100... and you might think that it is easy to use such large leverage. In fact, the leverage shared here does not make much sense, because the leverage number is not the actual leverage level. Like I wrote above, the leverage ratio is the holding value divided by the actual margin value.
Someone with $500 in capital, and they enter a $1000 long position, their actual leverage is x2 (if using cross funds), but the leverage displayed depends on how they are set up.
If they ask for x100, the deposit is only worth 10$, if it is x10, a 100$ deposit is required. But basically they all have a liquidation price = entry price/2 (because the actual leverage is x2)
Another tip that many people may not know is that Binance Future has 2 trading modes, One-Way Mode and Hedge Mode.
Anyone who has ever traded Forex will be familiar with this. Hedging mode allows users to open multiple positions, even in opposite directions, while one-way mode merges positions into one.
Example:
You go long $1000 worth of BTC at $20,000, then you go on to add another $500 long position when the BTC price rises to $30,000.
If using the one-way pattern, you would hold 1 long position of $1500 at an average price of $22,499,
Whereas with hedging mode you will find yourself with 2 of the above contracts.
In general, these two methods are basically just for more convenient position management and have basically no impact on the actual profit of the transaction.
Crossover/Segregated Funds
These are the two margin modes for holding contract positions. With Cross mode, the system will know that you have spent all the funds in your future account to ensure the position is closed. Using segregation means that you limit a certain amount of funds in your account to hold a certain position.
Trading Options
This can be considered one of the most “mysterious” financial products in the crypto market. I have never seen anyone ask or know about this product. However, it is a tool with many strategies that financial professionals cannot ignore.
Understanding the basics first, an option is like an insurance contract that allows you to buy or sell an asset at a specific price at a specific time in the future, regardless of what the price is at that time. Most importantly, you are under no obligation to exercise this right.
There are two types of options, Call and Put, and when one sells the above option, these options must have a buyer respectively. Therefore, there will be a total of 4 positions when participating in Option. They are buy - call, sell - call, buy - put, and sell - put.
Before we dive into the uses of options on Binance, let’s first look at the familiar concepts of options: strike price, breakeven price, premium.
Strike-Price simply refers to the strike price of an option.
Premium is the premium paid to hold your option.
The breakeven price is the price at which you would break even if you exercised the option.
Let me give an example below to make it easier for everyone to visualize the above concept:
Assume that the current price of BTC on July 1st is $30,000 and person A sells a call option on BTC – 0207 – 30000 – C: This means that this person is selling a promise that by July 2nd, this person will Sold to the holder of this call option, it is held at $30,000 (strike price) regardless of the BTC price at the time. For example, if B purchases the option for 0.01 BTC, B must pay A a premium of $10. (This is the premium version).
So how much BTC price will this person B earn on July 2?
Because by July 2nd, person B can buy 0.01 BTC for $30,000 regardless of the actual price of BTC that day, so by July 2nd, for every $1000 increase in BTC price, this person will make a profit of $10. However, up or down, this person will have to pay the $10 Premium fee, so it's easy to see that if BTC goes to $31,000, this person will have a $10 profit that is enough to cover the Premium fee - so break even - that's bullish The price of the option is $31,000. (At breakeven, the option is in price)
If BTC rises to $32,000, this person will have a profit of $10, and if it rises to $35,000, the profit will be $40. The increase is directly proportional to the increase in BTC. (If the option is profitable, it is in the In the money state.)
So what if BTC drops to $28,000? B would have to buy 0.01 BTC for $30,000 when the price was actually only $28,000, so B would lose $20, plus a $10 premium.
The answer is no. B still only loses $10 because B is not obligated to exercise this purchase option. Remember, the option buyer is under no obligation to exercise the option. They can do it when it's profitable, or quit when it's not. This means that even if the price of BTC drops to $10,000 or $5,000, Person B will only lose at most $10 through this call – and will not exercise the option he purchased. (State pays)
So you must have understood the basics, in detail, on Binance, there are two types of options: American options and vanilla options (also known as European options).
I will cover American options first because they are simple.
Such options are only available in the Binance mobile app.
The interface is simple, you can see there are only 3 types of commands: Call - Put - Vol.
When you enter a BTC amount here and place an order, you are always in the position of an options buyer. Binance is the only party selling options in this category.
The time frame is the maximum period for which the option is maintained.
Calls and puts are as mentioned above. When you buy a Call, you are betting that the price will go up; when you buy a Put, you are betting that the price will go down. What about Wall? When you buy Vol (short for volatility), you are betting on the price movement of an asset. In other words, as long as the fluctuation is large enough, you will make a profit regardless of whether the price rises or falls. Why?
As mentioned above, you can see an options buyer - their profits are not expected to be limited, and their maximum loss is only the premium fee. Therefore, they can implement a Straddle strategy, executing both Put and Call with the same trading volume, as long as the price movement is large enough to bring a profit greater than the sum of the premium fees of Put and Call. So if you bet Vol, you would have 2 breakeven points.
This strategy is used when you anticipate an upcoming movement in an asset's price (for example, due to news).
In addition to American Option, Binance also has Vanilla Option - allowing users to become buyers and sellers of options, not just buyers like American Option. However, I will not write a tutorial because the product seems to be an incomplete derivative of Binance since the seller does not have to pay the premium in case the buyer is unprofitable. This makes no sense because if the buyer makes a profit - the seller will almost certainly lose money since he has to sell the asset at a price below the market price or buy it at a price above the market price.
The option seller only earns the premium premium when the option buyer does not exercise his option.
Moreover, the liquidity of this product is extremely low, and participation will not yield considerable returns. It is recommended that you do not participate.
Leveraged Tokens
Another type not found in traditional financial products are leveraged tokens.