Main conclusions:
In spot markets, traders buy and sell cryptocurrencies for immediate delivery.
In futures markets, traders buy and sell derivative contracts that reflect the value of a specific asset.
Many experienced traders prefer futures trading because it allows them to profit from any market direction.
Spot markets offer traders a variety of digital assets to buy and hold, while futures markets allow traders to benefit from small price movements in either direction.
Typically, spot markets trade commodities, currencies, stocks and bonds for immediate delivery. And futures markets deliver the underlying assets and futures contracts at a predetermined date in the future.
Spot and futures markets are key elements of the traditional financial asset ecosystem and play an equally important role in the cryptocurrency space.
In this article, we will look at the main differences in trading these two markets.
What is crypto trading on the spot market?
Spot trading is the buying or selling of digital assets, such as Bitcoin or Ethereum, for immediate delivery. In other words, cryptocurrency trading occurs directly between market participants: buyers and sellers. In the spot market, owners of cryptocurrency assets receive certain rights, in particular the right to vote when creating a fork and the opportunity to participate in staking.
Cryptocurrency exchanges like Binance allow spot trading, exchanging fiat for cryptocurrency or cryptocurrency for cryptocurrency. Spot exchanges act as intermediaries for buyers and sellers trading crypto assets. If supply and demand match, the exchange executes the transaction. Spot exchanges operate 24 hours a day, seven days a week, meaning users can buy and sell cryptocurrency at any time and on any day.
Let's say you want to buy Bitcoin with fiat (USD) on the spot market. To do this, you need to find a BTC/USD trading pair on the spot market of the selected crypto exchange and place an order to buy a certain amount at the desired price. Once the transaction is completed, the tokens will be in the spot wallet. They can be held with the expectation that the price will rise, or converted to buy altcoins that you think may rise in value.
If you hold assets after purchasing them on the spot market, you can make money over time by increasing the value of the cryptocurrency.
What is cryptocurrency futures trading?
Participants in the futures market trade contracts that reflect the value of the underlying cryptocurrency. When purchasing a futures contract, the user does not purchase the underlying asset. Instead, he becomes the owner of the contract, committing himself to buy or sell the underlying asset at a future date. Therefore, owning a futures contract does not provide additional economic opportunities such as voting or staking.
Futures contracts provide protection against volatility and adverse price movements in the underlying asset. Additionally, this tool allows traders to speculate on the future price of a particular cryptocurrency.
Futures contracts can be used to benefit from price volatility. Futures contracts allow you to participate in the movement of a cryptocurrency, regardless of whether prices are rising or falling. In other words, they can be used to speculate on the price of a cryptocurrency instead of buying the underlying asset.
When the value of an asset is expected to rise, you buy a futures contract, opening a long position. When the value of an asset is expected to fall, you sell it by opening a short position. Profit or loss will depend on the outcome of your forecast.
Derivatives exchanges like Binance Futures make it easier to trade derivatives such as cryptocurrency futures. Like spot exchanges, derivatives exchanges operate 24/7. The main difference between these exchanges is that due to the complexity of derivatives products, derivatives exchanges offer protection and risk management mechanisms such as insurance funds.
Trading cryptocurrencies on spot and futures: main differences
1. Leverage: The futures market is so attractive to traders precisely because of leverage. It allows you to use capital in the futures market most efficiently. For example, to purchase 1 BTC on the spot market you will need thousands of dollars ($50,000 at the time of writing). A futures contract allows you to open a futures position in BTC by paying only part of the cost. This is only possible when using leverage. The higher the leverage, the less money you need to invest in the position. Leverage is not available in spot trading. So if your spot wallet has 5000 USDT, you will only be able to buy 5000 USDT worth of Bitcoin.
2. Flexibility of long and short positions: When buying Bitcoin on the spot market, the trader only makes a profit if prices rise. However, you won't be able to make a profit in a bear market. However, futures contracts allow you to make money on short-term price changes regardless of market direction. Even when the price of Bitcoin falls, a trader can make money by opening a bear trade. Futures contracts allow you to develop complex trading strategies such as shorting, arbitrage, pairs trading and so on. In addition, they are also used to hedge downside risk and protect a portfolio from extreme price volatility. Miners and long-term asset holders often use futures contracts to protect their portfolios from unexpected risks.
3. Liquidity: The futures market offers high liquidity and trillions of dollars in monthly volume. For example, Bitcoin trades on the futures market at $2 trillion, which is higher than Bitcoin trades on the spot market. High levels of liquidity support the pricing process and allow traders to execute trades quickly and efficiently. The risks in a liquid market are usually lower since there is always someone willing to take the opposite side of the trade, reducing the risk of slippage.
4. Prices in the futures market and the spot market: The price of a cryptocurrency in the spot market, that is, the spot price, determines all spot transactions. Buyers and sellers determine cryptocurrency spot prices through the economic process of supply and demand. And in the futures market, prices are the sum of its current spot price and the cost of holding the position until the delivery date. The basis is the holding price of the futures contract. It can be either a positive or negative number. A positive basis means that the futures price is trading above the spot price and vice versa. The basis fluctuates depending on changes in supply and demand, but due to the effects of arbitrage it comes to zero at the end of the contract.
Futures trading on Binance
Binance Futures offers a wide selection of cryptocurrency derivatives, providing investors and traders with a variety of trading options.
Two lines of futures products are available to users:
USD-margined futures contracts: support perpetual and deliverable contracts with up to 125x leverage and settlement in USDT and BUSD. Learn more about the features of USD-margined contracts by following the link.
Coin-margined futures contracts: support perpetual and deliverable contracts with up to 125x leverage and settlement in cryptocurrency. Learn more about the features of Coin-margined contracts by following the link.
USD-margined and Coin-margined contracts meet the specific needs of users. These contracts provide flexibility and variety, allowing you to trade futures contracts backed by a wide variety of margin assets. These contracts also offer strategic advantages in various market conditions, allowing for significant increases in profitability.
If you're interested in futures trading, learn the pros and cons of the different types of futures contracts. To make futures trading most effective, we recommend:
Find the right exchange: Binance Futures offers a wide selection of cryptocurrency derivatives such as perpetual futures, options, leveraged tokens and quarterly futures.
Diversify your contracts: Consider whether both types of futures contracts are right for you. For long-term traders, quarterly coin-margined contracts are suitable because they do not charge funding fees and optimize profits in bull markets. Active traders are encouraged to use USD-margined contracts as they provide the flexibility of trading with a single settlement currency across all USD-margined futures contracts without the need to convert to other cryptocurrencies.
Conclusion
Spot trading is quite simple and easy to understand for most beginners. This is why it is popular among users who are just starting to trade cryptocurrencies. Futures trading, in turn, offers strategic advantages and allows you to increase your profits.
Trading futures can be profitable if you have the right knowledge and risk management strategies to prevent serious losses. Therefore, before trading futures, you need to develop such a strategy, conduct a thorough analysis, and also understand the advantages and risks of this instrument.
To learn how to add cryptocurrency to your portfolio, check out the following articles:
(Blog) Cryptocurrency futures: what you need to know when starting to trade
(Blog) Crypto Futures Risks and Money Management: 5 Ways to Better Manage Risks When Trading
(Support) Binance Futures Products and Features Overview
(Academy) How to Create a Well-Balanced Crypto Portfolio
...and other frequently asked questions about Binance Futures.
