Cryptocurrency trading has grown far beyond just purchasing an asset and then sitting on it until it becomes worth more. At present, there are two types of cryptocurrency trading you may consider – spot trading and futures trading. Each of these ways to trade allows you to enter the crypto market differently. Knowing how these types of trading differ from one another may help you decide which one is better suited for your purposes depending on your goals, risk aversion, and activity levels.
What Is Spot Trading?
Spot trading is one of the simplest ways to get started with cryptocurrency trading. With spot trading, you simply buy the asset at its current market price and then hold it. If the market price rises, your investment goes up in value as well. This type of trading doesn’t require the use of borrowed funds, there are no dates when the deal expires, and you don’t have to settle the contract in the future.
This kind of trading is perfect for those who want to invest in cryptocurrencies in an easy manner. As the asset is fully owned by you during the spot trading, you may transfer it anywhere, store it or even stake it with no need to think about the expiration of the contract.
What Is Futures Trading?
Opposite to spot trading, futures trading does not involve acquiring an asset. What you do instead is sign a contract that follows the price of the asset in order to be able to speculate on its price movement. Additionally, futures are used in order to leverage your trades, making the size of your positions much greater than your initial deposit.
One of the advantages of futures for active traders is that you may create both long and short positions at the same time.
Key Differences at a Glance
| Feature | Spot Trading | Futures Trading |
| Ownership | You own the asset | You hold a contract, not the asset |
| Leverage | Not typically used | Often available |
| Direction | Profit mainly when price rises | Can profit in rising or falling markets |
| Time Horizon | Often longer term | Can be short term or long term |
| Complexity | Simpler for beginners | Requires more active monitoring |
Which One Fits Your Strategy?
For newbies in the crypto market or those who like to adopt a more relaxed approach and do not like to trade a lot, the spot trading approach will suit them best. This approach means holding onto the assets until one decides to sell them.
At the same time, those traders who are used to analyzing the chart daily and who are capable of managing their positions will definitely choose the futures trading approach, which will help them to deal with both rises and falls in the prices. Indeed, many crypto traders apply both these approaches simultaneously, with one buying and holding the spot for a long period of time and the other opening the future to be able to trade short-term.
BTCC Exchange offers both these types of trading on one platform
A Practical Example
This is an example of how these two strategies work in practice when applied to different coins. For instance, there is a crypto called PEPE, which is based on Ethereum and gained great fame as a meme coin. One can look through the PEPE Price USD page where it will become evident that the token price equals just a few hundred thousandths of a cent per token, with its circulating supply being hundreds of trillions and market capitalization – about one and a half billion dollars.
In the case of spot traders, they simply buy the token and wait for its price to go up. For futures traders they may open a long position in case they think the price of PEPE will rise, and a short position in case they expect the price to go down, without purchasing the token. Such a possibility occurs due to quick price movements of the coin.
Managing Risk in Either Approach
Certain measures are essential regardless of your choice of one method over the other. Do not invest funds that you would not be comfortable to operate in highly volatile markets. Make sure to study how to trade on leverage before you implement it in order to understand the impact it may have on the balance of risk versus reward. It will also be useful to set your entry and exit points prior to entering into a transaction.
Final Thoughts
It is a misconception to think of spot and futures trading as alternatives to each other since they do not serve the same purpose but rather represent two different instruments used for achieving two different goals. Understanding the features of each type of trading will help you to choose one or another based on your level of experience and available time for the analysis of the market situation.
