The Differences Between Bitcoin Futures and Spot Trading
4 min read · · Korean original
Contents 3
In this post, I'll explain the differences between futures and spot trading for cryptocurrencies like Bitcoin. Crypto trading works much like traditional futures and spot trading, but there are a few differences.
Concept and Features of Futures Trading
- Bitcoin or crypto futures trading means trading contracts that represent the value of a specific cryptocurrency
- Traders don't hold the cryptocurrency itself; instead, they buy or sell futures contracts.
- Futures trading means trading contracts in which you agree to buy or sell the cryptocurrency at a specific point in the future.
Concept and Features of Spot Trading
- Bitcoin or crypto spot trading means trading the coins themselves directly.
- The cryptocurrency is exchanged directly and immediately between buyers and sellers, the market participants.
- When you trade on the spot market, the cryptocurrency and its ownership are transferred immediately, and you can receive holding benefits such as participating in staking.
4 Differences Between Bitcoin Futures and Spot Trading
The core difference between futures trading and spot trading is as follows.
- Trading contracts to buy or sell coins in the future - futures
- Directly exchanging the coins themselves at the moment of the trade - spot
Beyond that, however, there are four other key differences between futures trading and spot trading.
1. Leverage
In futures trading, you can use leverage, which lets you improve your capital efficiency. When trading futures contracts, you can open a 1 BTC futures position with margin that is lower than the market value of 1 BTC.
In spot trading, on the other hand, you can't use leverage. So to trade 1 BTC on the spot market, you need the equivalent amount of funds.
2. Long and Short
In futures trading, you can bet on an asset's price going up or down. Betting on a rise is called going long, and betting on a fall is called going short.
If you hold a long position, you profit when the price rises, and if you hold a short position, you profit when the price falls.
Also, when coin prices fall, you can use shorts for hedging, offsetting the drop in value of the spot assets you hold.
3. Liquidity
Liquidity in the Bitcoin futures market is far larger than in the spot market. Futures trading volume reaches trillions of dollars a month, and for Bitcoin it averages 2 trillion dollars a month.
Compared to the spot market, the futures market offers abundant trading volume and liquidity, which allows traders to enter and exit the market efficiently whenever they want.
4. Price Difference
Cryptocurrency prices are determined by the mechanism of supply and demand. The spot price is the final price that forms naturally on the spot market. The futures price, however, is determined by adding a futures premium to this spot price.
The futures premium can be positive or negative. A positive futures premium means the futures price is higher than the spot price, and conversely, a negative premium means the futures price is lower than the spot price.
This premium can change depending on supply and demand in the futures market, so an asset's price on the futures market can differ from its price on the spot market.
That wraps up the basic concepts of spot and futures trading, along with their key differences. If you've never traded futures, these concepts may feel a bit difficult. Reading my other futures-related posts on this blog alongside this one should help you understand.
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