Help CenterWhat is Cryptocurrency Spot Trading?
In the spot market, you buy and sell cryptocurrencies like Bitcoin and Ethereum with immediate settlement. In other words, cryptocurrencies are directly transferred between market participants (buyers and sellers). In the spot market, you own the cryptocurrency, granting you the right to economic benefits, such as voting on major forks or participating in staking.
What is Cryptocurrency Contract Trading?
A cryptocurrency contract represents the value of a specific cryptocurrency. When you purchase a futures contract, you do not own the underlying cryptocurrency. Instead, you own a contract that signifies you agree to buy or sell a specific cryptocurrency at a future date.
What are the Differences Between Cryptocurrency Spot Trading and Cryptocurrency Contract Trading?
- Leverage
Leverage provides significant capital efficiency in contract trading. With futures contract, you only need to invest a small fraction of the market value of 1 BTC to open a position of 1 BTC. In contrast, spot trading does not offer leverage. For example, to buy 1 BTC in the spot market, you need to prepare thousands of dollars. In this scenario, if you only have 10,000 USDT available, you can only buy an equivalent amount of Bitcoin worth 10,000 USDT.
- Flexible Long or Short Positions
If you hold cryptocurrencies in the spot market, you can profit from the appreciation of the ryptocurrency over time. In contrast, futures contracts allow you to profit from short-term price fluctuations, regardless of whether prices rise or fall. Even if Bitcoin prices drop, you can predict the decline and profit as prices continue to fall. Futures contracts can also be used to hedge risks and extreme price volatility, making them an ideal option for miners and long-term investors.
- Liquidity
The cryptocurrency contract market has a monthly trading volume of up to trillions of dollars, providing excellent liquidity. For example, the monthly average trading volume in the Bitcoin contract market is $2 trillion, surpassing the trading volume of the Bitcoin spot market. This strong liquidity facilitates price discovery and allows traders to execute trades quickly and effectively in the market.
- Contract vs. Spot Prices
Cryptocurrency prices are determined by supply and demand processes between buyers and sellers. Spot prices are the current prices of all trades in the spot market. On the other hand, contract prices are based on the spot price plus a contract premium. The contract premium can be positive or negative. A positive premium indicates that the contract price is higher than the spot price; conversely, a negative premium means the contract price is lower than the spot price. Changes in supply and demand can cause fluctuations in the contract premium.