Key Questions Answered
- What is Spot trading: Crypto Spot trading essentially entails purchasing cryptocurrencies (such as Bitcoin) and holding until the value increases. It also includes the trading strategy of buying other altcoins that investors believe will rise in value. A Spot Market is the underlying market where crypto assets are exchanged and settled instantly.
- What is Futures trading: The fundamental idea behind Futures trading is that investors bet on the price of an asset such as gold or Bitcoin to either go up or down. Whether they profit or lose depends on the accuracy of the prediction. In the Bitcoin derivatives market, traders don’t own actual bitcoins but rather speculate on Bitcoin’s future market price.
As cryptocurrencies continue to garner more attention, become more popular, and receive more credibility, the marketplaces to purchase these assets and invest in them are also becoming more important. Therefore, it is essential for investors both beginner and advanced to understand the dynamics of these markets in order to make the best possible trades.
Since 2018, the cryptocurrency trading landscape has evolved from a collection of spot markets to a hybrid system featuring complex and popular derivatives products. This shift from traditional spot markets to a more diverse spot and derivative landscape has also skyrocketed the crypto industry as a whole, for both exchanges and regular investors.
How did crypto derivatives trading get popular?
Cryptocurrency derivatives have witnessed a number of developments in recent years. In 2020, old cryptocurrency derivatives platforms set new records in terms of trading volume as new players streamed in with innovative products. For the first half of 2021 trading volumes for both spot and derivatives were identical, and it wasn’t until June that crypto derivatives trading exceeded those of spot.
However, trading in crypto derivatives is a high-risk, high-reward endeavor that is more suitable for experienced traders and investors. This is because many exchange platforms allow the use of leverage. This means futures traders can wager bigger speculations and commit to a much larger position than they can cover with their current balance. When market conditions are good this can yield large gains, however, when there is a rapid downturn it can result in big losses. For these reasons, crypto futures exchanges have in recent months found themselves under greater regulatory scrutiny.
Regardless, there’s no stopping cryptocurrencies and the investment wave that has followed. More and more investors are flowing into the market. Therefore, for beginning investors, understanding the difference between spot trading and futures trading is one of the first steps towards becoming a successful and more knowledgeable trader.
What is Spot Trading in Crypto?
When it comes to cryptocurrencies, spot trading is the most basic type of investment you can make. It entails buying a crypto at the current market price and holding it in your exchange wallet until you decide to make a subsequent trade.
What is a Spot Market?
The spot market is where financial instruments such as commodities, currencies, and securities are traded for immediate delivery. In the Bitcoin spot market, investors own, buy, and sell actual Bitcoin. In simple terms, it is the underlying market where bitcoins are exchanged.
Example of a Spot Market
Below is a graphic of the BTC/USDT spot trading pair on Phemex. BTC is the base currency, which is the first currency appearing in the currency pair. Following that is USDT, which in this case is the quote currency. In this market, traders buy and sell BTC for USDT, or they can use USDT to purchase BTC.
Spot trading vs. OTC: What is the Difference?
Over the counter (OTC) is a type of spot market where trades are based on contracts that are done openly between two parties, and not subject to guidelines from exchanges. Also, OTC trading mitigates slippage risk entirely because the traders agree on the final execution price in advance.
Generally, anyone that wants to buy or sell large amounts of cryptocurrency quickly, privately, and without incurring slippage prefer to use OTC rather than traditional exchange spot markets.
How does spot trading work on Phemex?
On Phemex, we have 34 spot trading pairs that traders can choose from. We also allow users to buy crypto with a credit card directly. Spot traders can decide to trade, which means they can buy or sell any of these 34 cryptocurrencies against USDT. The best benefit of trading on Phemex is that Premium members are not charged any trading fees. Phemex is the first major spot exchange to offer this model, as many other global crypto exchanges and all of our competitors generally charge 0.1% for every trade. Premium Membership prices range from $9.99/month to 69.99/year.
To learn the technology behind spot and futures, head over to our Academy
How to trade crypto?
What is Futures Trading in Crypto?
A derivative is a contract for which value is based on the performance of the underlying entity, which can be a financial asset or a set of assets like commodities, currencies, and stocks. Derivative products are usually used to mitigate risk or to increase exposure to certain price movements, otherwise known as speculation.
Derivatives Trading vs. Spot Trading
Trading derivatives is different than spot trading. First, this is because traders do not actually need to own the underlying cryptocurrency. For example, let’s consider the GOLD/USD contract. When trading this product, you are not actually buying or selling gold itself. However, the value of the contract is designed to follow the price of gold. This means that as the value of gold rises or drops, so does the value of the contract. In this way, you are able to benefit from the price movements of gold without actually ever having to buy or sell gold.
Of course, there are many more complexities involved in trading contracts, but the fundamental idea is that you bet on the price of an asset such as gold or Bitcoin to either go up or down. Whether you profit or lose will depend on the accuracy of your prediction.
What is a Futures Market?
In the Bitcoin derivatives market, investors enter into an agreement or contract to buy Bitcoin at a predetermined price and a specified time in the future. As mentioned above, in this market investors don’t own actual bitcoins but rather trade on Bitcoin’s speculative price. Bitcoin contracts, which can either be futures, perpetual contracts, swaps, or options obtain their value from the value of Bitcoin.
How to make money with Futures trading?
Since the price of cryptocurrency may rise and drop dramatically in a short period of time, it is important to pay special attention to your investment policy. On this aspect, Phemex provides various tools to facilitate our traders’ cryptocurrency strategies like take profit, stop loss, and trailing stop. We advise all investors to take advantage of them for better crypto derivatives trading. Below is a graphic of Phemex’s contract trading platform for BTCUSD.
How did Bitcoin Derivatives gain Popularity?
As Bitcoin derivatives are a new frontier in the financial markets, they have rapidly gained popularity to become one of the most traded products. At the forefront is the Bitcoin futures which have become the most traded cryptocurrency derivative since 2017. The average daily trading volume of Bitcoin futures is about 3,500 contracts with an accumulative value of over $100 billion. Considering that the value of Bitcoin in the spot market has considerably dropped since December 2019, these figures are impressive.
From the statistics, it shows that investors are gaining confidence in derivatives and even opting to trade them instead of trading the spot market. In Bitcoin futures, for example, traders are able to hedge against the volatile market Bitcoin prices.
Guides on trading bitcoin futures
Spot Markets vs. Futures Market: What is the preferred market to trade in?
Whether one prefers to make spot trades or futures is a matter of personal philosophy, and there are various positives and setbacks to them both. Spot traders may prefer to own the underlying crypto because they are long term holders and are trying to accumulate the asset. On the other hand, more experienced traders who trade futures prefer derivatives because they can better leverage their margin, they want to make more money, and they can use futures to hedge against other market movements. Therefore, investing in crypto requires individuals to fully understand the spot and futures benefit and disadvantage matrix.
Advantages and disadvantages of spot markets
What is the benefit of spot trading?
One of the positive aspects about trading in spot markets is that investors are trading in real assets, and not future contracts. Moreover, investors have direct ownership of the coins. These two aspects in particular give traders a greater sense of security and a more simple way to invest.
What is the downside of spot trading?
Regarding trading, spot markets require higher fees to use leverage, and since they have a limited supply of coins in their lending pools, they thus offer lower levels of leverage.
Operationally, one of the potential downsides to spot trading cryptocurrencies is investors must first set up a digital wallet with online platforms and exchanges. This process may be difficult for those unfamiliar with the crypto landscape. Second, certain web-based exchanges are more susceptible to technical errors, app freezes, and security concerns. Thus, it is potentially risky to leave cryptos in your exchange spot wallet, as you may be unable to access them when the markets are extremely active.
Advantages and disadvantages of futures markets
What is the benefit of trading in the futures market?
When trading crypto futures, particularly with leverage, the gains are more substantial than in the spot markets. Moreover, futures give investors the ability to employ more flexible trading strategies, like going short or long, diversifying, and hedging against other price movements. Thus, you can do more than just buying and selling cryptos.
What is the downside of trading in the futures market?
One of the main downsides to futures trading is one, investors do not own the underlying assets and two, traders subject to high leverage run the risk of being liquidated and losing big on incorrect speculations.