This article only covers the differences between spot trading and futures trading in crypto assets, with futures trading being narrowly defined as perpetual contract trading.
What is spot trading?
In a spot market, a trader buys and sells cryptocurrencies for immediate delivery; in other words, cryptocurrencies are directly transferred between market participants (the buyer and the seller). Therefore, traders have direct ownership of the cryptocurrencies in question.
What is futures trading?
Traders do not own the underlying cryptocurrency when they purchase a futures contract. Instead, they own the contract under which they have agreed to buy or sell a specific amount of cryptocurrencies at a later date.
What are the differences between futures trading and spot trading?
To purchase a certain amount of cryptocurrencies in the spot market, traders have to pay an equivalent sum of assets.
Futures trading, on the other hand, provides leverage, which allows traders to trade with a fraction of the cost they would otherwise need to bear in the spot market, thus providing capital efficiency.
For example, traders would need 20,000 USDT to purchase 1 BTC in the spot market; however, in futures trading, they may use a 1:100 leverage and buy 1 BTC with a margin of just 200 USDT instead.
Please be advised that while traders of futures contracts can enjoy increased capital efficiency and returns by using leverage, they have to undertake much higher risks as well.
- Flexibility to long or short selling
When traders purchase crypto coins in the spot markets, they make a profit only if prices go up.
Futures contracts allow you to establish either long or short positions to make a profit by predicting the price correctly. Therefore, traders may use futures contracts to hedge against downside risk and protect a portfolio from extreme price volatility in the spot markets, or profit directly from price fluctuations of futures contracts.