Spot vs Futures Trading in Crypto
So you've finally decided to dip your toes into the world of crypto trading, and now you're staring at your screen, wondering if you should go for spot trading or futures.
Spot trading is the "what you see is what you get" of crypto. You show up, pay your money, and walk away with digital coins in your virtual pocket. It's straightforward, it's tangible, and it's got that warm, fuzzy feeling of ownership.
Futures trading, meanwhile, is like playing poker with the market – you're betting on prices in the future without owning the actual crypto, using leverage to amplify your gains (and, spoiler alert, your losses). It's the difference between owning a car and betting on which car will win a race while it's still being built.
Let's break down these two trading styles, explore their pros and cons with practical examples, and help you choose the right approach. Whether you're a cautious newbie or a thrill-seeking trader, by the end of this, you'll know whether to play it safe with spot or go full crypto cowboy with futures.
What is Spot Trading in Crypto?
| Spot Trading Pros | Spot Trading Cons |
|---|---|
| Beginner-friendly way to trade crypto | You have to use your own capital for trading without access to leverage |
| You own the assets you trade | You can't short crypto in the spot market |
| You can access a wide range of cryptocurrencies in spot markets | Less liquid and more expensive for traders than the futures market |
| Less risky than derivatives trading | |
| Less complex on the regulatory front than futures trading | |
| Real-time prices for asset pairs |
When you trade cryptocurrencies in the spot market, you buy and sell Bitcoin (BTC), Ethereum (ETH), and other digital assets at current market prices for immediate delivery. As crypto is transferred directly between buyers and sellers, you have full control over the coins you trade on the spot.
With spot trading, you can't use any leverage for your trades (unless you place spot margin trades, which is a completely different matter). Instead, you rely exclusively on your own capital to buy and sell crypto.
Spot trading shouldn't be confused with "HODLing," a long-term investing strategy in which you buy a cryptocurrency and hold it for several months (or even years) before selling it for a profit. While both strategies involve purchasing and disposing of crypto on the spot market, spot trading aims to generate profits on multiple short-term trades.
Spot trading has a 24-hour volume in excess of $100 billion (as of July 26, 2024) and can be accessed on most centralised exchanges (CEXs) and decentralised exchanges (DEXs).
What is Futures Trading?
| Futures Trading Pros | Futures Trading Cons |
|---|---|
| You can trade cryptocurrencies with leverage to amplify your potential gains | Using leverage makes trades riskier and may lead to greater losses |
| No need to own the underlying asset to gain exposure to crypto | No ownership over the cryptocurrencies you trade |
| The ability to capitalise on downward price movements by shorting futures | The futures price may differ from the spot market price |
| Hedge against market risks | Limited variety of futures trading pairs |
| Take advantage of a highly liquid market | |
| Lower trading fees than for spot market trades |
When you trade crypto futures, you agree to buy or sell a type of derivatives called futures contracts at a set price at a future date. Since they only derive their value from the underlying assets, you don't own any of the cryptocurrencies you trade.
On most digital asset exchanges (including VALR), crypto futures trading is offered in perpetual futures. Unlike their traditional counterparts, perpetuals do not have an expiration date. Thus, traders can hold the contracts for virtually indefinite periods while speculating on cryptocurrency prices.
Contrary to the spot market, you can amplify your potential gains with leverage via futures trading. However, as you borrow capital on top of your initial deposit to increase your trading size, margin trading crypto perpetuals comes with additional risks, which can easily translate into significant losses if you don't know how to manage your risks.
In addition to leverage, another key advantage of crypto futures trading is that you can not only go long (buy) on contracts but also short (sell) them to profit from downward price moves. This makes them particularly useful during bear markets.
With futures trading, you can open trades in the opposite direction of existing trades to offset the primary position's potential losses. Consequently, you can hedge against market risks like volatility and unfavorable price movements.
With a 24-hour trading volume of $557 billion, the crypto derivatives market accounts for 84.6% of digital asset volumes. Thus, futures are more liquid than spot digital asset pairs. Moreover, most exchanges offer lower fees for futures trading. For example, while takers pay 0.05% for trading spot crypto-to-crypto pairs, it only costs 0.04% to trade perpetual futures pairs on VALR.
Due to leveraged trades, crypto futures are high-risk financial instruments, and trading them is restricted or banned in some jurisdictions. While futures prices may differ from the spot market price, traders can access a limited selection of assets due to their complexity.
What Are the Key Differences Between Crypto Spot and Futures Trading?
| Spot Trading | Futures Trading | |
|---|---|---|
| Settlement Date | Instant | At the expiration date |
| Leverage | No | Yes |
| Capital | 100% traders' capital | The trader's initial deposit, plus borrowed capital |
| Short Positions | No | Yes |
| Selection of Assets | Wide | Limited |
| Liquidity | High | Higher |
| Trading Fees | Normal | Low |
| Ownership of Crypto | Yes | No |
Choosing the Right Approach
Knowing the differences between spot and futures trading, you must choose the right approach to achieve the best results with your strategies. Below, we have listed a few factors to consider to support you in decision-making:
Risk tolerance: Do you seek to keep your risks at the minimum, or are you comfortable taking higher risks?
Available capital: How much funds do you have available in your crypto wallet that you can dedicate to trading crypto?
The state of the market: Are crypto prices rising or falling, or are they trading sideways?
Time horizon: Do you aim to place short-term, mid-term, or long-term trades as part of your strategy?
Goals: What are your trading goals? Make your objectives realistic, and consider risk management, gain targets, skill development, and portfolio growth.
Practical Scenarios for Traders
In this section, we have listed a few practical scenarios in which you may choose spot trading over futures trading and vice versa:
Scenario 1 - Newbie: You are new to crypto and inexperienced in trading. In such a case, we recommend trading digital assets on the spot until you gain more experience.
Scenario 2 - Bear Market: Crypto prices have fallen significantly from the last bull cycle's highs. As bears have taken over the market, you may have better chances at shorting cryptocurrencies. Since you can't do that in the spot market, futures trading may sound like a better choice.
Scenario 3 - Risk Averse: You are not comfortable taking high risks when trading crypto. In that case, you should stick to the spot market, as it is less risky than futures contracts.
Scenario 4 - Risk Seeking: You are a risk-neutral trader with extensive expertise and experience in trading cryptocurrencies. However, you don't have the necessary capital to generate substantial profits from trading digital assets on the spot. With futures trading, you can use leverage to increase your position size and amplify your potential gains with efficient risk management and a sound strategy.
Trade Crypto on VALR's Spot and Futures Markets
Spot trading crypto has lower risks, is tailored for beginners, and offers you full ownership of the digital assets you trade. On the other hand, futures trading provides you with the ability to use leverage, hedge against market risks, and short coins.
Whether you're drawn to the simplicity of owning actual digital assets or the adrenaline rush of leveraged bets, your choice boils down to your risk appetite, market savvy, and how much you enjoy roller coasters.
Ready to get started? Trade crypto on VALR's spot and futures markets!
Frequently Asked Questions
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Spot trading involves buying and selling cryptocurrencies for immediate delivery at current market prices, giving you ownership of the assets. Futures trading involves agreeing to buy or sell cryptocurrency derivatives at a set price on a future date without owning the actual crypto, often using leverage to amplify potential gains or losses.
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Bitcoin spot trading involves buying and selling actual Bitcoin for immediate ownership. Bitcoin futures trading involves contracts to buy or sell Bitcoin at a future date without owning the actual Bitcoin, allowing traders to speculate on its future price movements.
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Crypto futures work by allowing traders to enter into contracts to buy or sell a cryptocurrency at a predetermined price on a future date. Traders can use leverage to amplify their positions and can profit from both rising and falling markets by going long or short on the contracts.
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Spot crypto trading is the process of buying and selling cryptocurrencies for immediate delivery at current market prices. It involves direct ownership of the digital assets and does not involve leverage.
Risk Disclosure
Trading or investing in crypto assets is risky and may result in the loss of capital as the value may fluctuate.
VALR (Pty) Ltd is a licensed financial services provider (FSP #53308).
Futures trading is provided by VALR DAM Pty Ltd as a Juristic Representative of CAEP Asset Managers Pty Ltd (FSP number: 33933) an authorised financial services provider.
Disclaimer: Views expressed in this article are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.
