All You Need to Know About Spot Trading and Futures Trading

Spot trading and futures trading are the most popular ways cryptocurrencies and other financial assets are traded today.

In spot trading, your transactions are executed immediately (think ‘on the spot’) and settlements are made in the underlying cryptocurrency being traded. The most common ‘Buy’ and ‘Sell’ orders you make are spot trades and most traders start out their careers with spot trading.

Futures trading is slightly more technical than spot trading. In futures trading, you bet on the price movements of the underlying cryptocurrency and earn profits if your predictions are right without needing to hold the asset itself. 

If you have been spot trading for a while and are looking to level up, futures trading is naturally what most traders try out next.

In the rest of this piece, we take a look at how spot and futures trading work, their pros and cons, and how you can start spot trading and futures trading on BingX.

All You Need to Know About Spot Trading

Spot trading is the easiest way to trade cryptocurrencies and just about any other financial asset. If you believe the price will rise, you ‘Buy’ or go long. And if you have a bearish bias, you ‘Sell’ or go short . Whether you are a new crypto trader or are just looking to refresh your memory, here’s all you need to know about spot trading:

How Does Spot Trading Work?

In spot trading, transactions are executed immediately and you have direct ownership of the underlying asset. 

For example, let’s say after your market analysis, you are strongly bullish on Bitcoin, BTC and wanted to go long on the coin. You can simply buy BTC on the spot market by selling some of your existing stablecoin, receiving BTC to your spot wallet from another trader, or buying BTC directly with your credit card.

Source: BingX.com BTC Spot Trading

Actual BTC is then deposited into your spot wallet once the trade is executed.

Spot trades are typically made on centralized exchange platforms like BingX but also Over-the-counter (OTC), peer-to-peer (P2P), and decentralized exchanges (DEX).

Your trade is matched with a trade or a number of trades made by other participants with an opposing bias. So in the BTC scenario, your trade is balanced out by trades from other traders who went short and sold BTC because they believe the price will fall.

If in the end, your bias is right and the price of BTC rises, you make a profit while the ‘opposing’ traders make a loss. The reverse also applies and you’ll make a loss while the other traders make a profit if the price moves against your bias (if the price falls).

What Are The Benefits of Spot Trading?

Spot trading is very easy to learn

As we stated earlier, most traders start out with spot trading because it is the easiest and most straightforward way to trade cryptocurrencies. Once you understand basic trading strategies and technical analysis, you can trade on the spot market.

The more advanced trading strategies bring in a whole new world of terminologies, strategies, and ideas that may be too overwhelming for newbies.

You are entitled to economic benefits

In spot trades, you own the actual asset or cryptocurrencies and can enjoy privileges like voting rights and interest. 

One core Web3 concept is that all platforms in the future will be built as Decentralized Autonomous Organizations (DAOs) – basically, you will be able to vote on how the platforms you use work by owning tokens (a more general term for cryptocurrencies) that are native to the platforms (similar to shares).

Source: DAOs – Etheruem.org

You can also earn interest on the cryptocurrencies you hold if you lend them out. 

Transparent trading prices

The current price of a cryptocurrency at any point in time is called the spot price or market price. When you open a position on the spot market, you are buying or selling the underlying asset at the current market price per unit. 

You are also charged negligible fees except slippage occurs i.e: price spikes very suddenly before your trade gets executed and your margin changes significantly.

What Are The Limitations of Spot Trading?

No leverage

Spot trading doesn’t offer leverage. To open a buy or sell spot position for 1 BTC for example, you will have to pay several thousands of dollars (the actual market price of $21,000 at the time of this writing). 

In other trading categories like futures trading, you can use leverage to open the same position size for a fraction of the actual market price. 

Hodling is an automatic buy

In a spot market, even just hodling the underlying asset is an automatic buy and you will make a loss if the price falls. To make a profit in a bear market using spot trading, you will have to short the cryptocurrency and buy it back at a lower price.

Financial instruments like futures and other derivatives, protect you from this hodl-buy duality.

All You Need to Know About Futures Trading

Futures trading allows you to make bets on the price of an underlying asset without needing to hodl it in your wallet. By trading futures, you can exploit price movement in either direction and protect your investment should the price move against your bias. Here’s all you need to know about futures trading:

How Does Futures Trading Work?

Cryptocurrency futures or futures contracts are a type of derivative trading instruments that don’t have a value of their own but rather ‘derive’ their value from the underlying cryptocurrency they represent.

They allow investors to tap into the liquidity and price movement of the asset without needing to buy it first. Here’s how futures trading works:

A futures contract is a binding agreement between two investors (either directly or matched through an exchange) to buy or sell an asset at a particular price on a particular future date, irrespective of what the actual spot price on that day will be.

For example, using Bitcoin once again, if you believe the price of BTC will rise and want to go long without buying the coin, you can trade BTC futures. 

Source: BingX.com BTC Futures

Let’s say the price of 1 BTC right now is $10,000, you can buy a BTC futures contract that allows you to buy BTC in say 60 days from now at $10,000 and hope the price rises. 

If in 60 days (the expiry date of the contract), the price is BTC has risen to $13,000, the seller (investor with an opposing bias) will be obligated to sell 1 BTC to you for $10,000 and you can then resell it for a $3,000 profit at the current spot price of $13,000.

The reverse is also the case. If the price falls, you will be obligated to buy it from the seller at $10,000 and make a net loss, while they make a profit.

What Are The Benefits of Futures Trading?

Provides Leverage

Futures trading allows you to use leverage on your positions. That is, unlike a spot trade where you have to pay in full for each unit of the asset, by trading futures, you can open positions for a fraction of the position price. 

Source: Babypips

This creates the potential for much higher potential profits if the price follows your bias. However, if the price goes against your bias, your losses are also multiplied if you use leverage, so your risk management should always be on point. 

Futures provide deep liquidity

Futures markets provide deep liquidity (a fancy way of saying, they are very busy markets).

Cryptocurrency derivatives – futures, options, and perpetual swaps – are the most traded financial instruments in the crypto market today, even more than spot trading (trading the actual assets they represent).

This means, there will almost always be an opposing position to match yours with and little to no downtime. You will also be able to quickly buy and sell futures without causing any drastic changes in the market price, thanks to the sheer market volume.

You can earn in both market directions

With futures trading, you can also earn profits in both bull and bear markets. Remember the buy-hodl duality in spot trading? By trading futures, you don’t buy the actual asset so you can avoid price volatility.

By trading futures, you can focus wholly on making a profit. If you’re bullish, you go long and if you are bearish, you open a short position and can make money if your bias is right.

Used for hedging

One of the most important use cases of futures and other derivatives is hedging. Hedging is used to minimize or offset risk or loss in an underlying asset by opening an opposing trade.

So let’s say you are hodling BTC and from your market analysis, you have spotted strong signals that the price may fall considerably. To protect your portfolio, you can trade BTC futures and go short on BTC.

If the price of BTC eventually falls, the losses you make from your hodl (buy) can then be offset by the profits you make from your BTC futures (sell) trade.

What Are The Limitations of Futures Trading?

They are riskier

Futures trading provides leverage allowing you to take more risk and earn more profit. But it’s also a double-edged sword and you can clear your entire margin if you don’t do proper risk management.

Need some technical knowledge

Futures trading is a little more technical than spot trading. The steeper learning curve is why most newbies start out with spot trading and then move to futures trading after they have reached an intermediate skill level.

No economic privileges

The essence of derivatives like futures is to protect investors from volatility and still allow them to profit from price movement without adding the coin to their wallets. 

But not hodling the tokens means you don’t get to enjoy the economic privileges of doing so. You won’t have the right to vote in a DAO or earn interest.

Get Started With Spot Trading and Futures Trading on BingX

You can get started with spot trading and futures trading on BingX right away. 

For spot trading on BingX, you can choose between market orders (executed immediately) and limit orders (executed once the price hits preset points).

For futures trading on BingX, you can choose between standard futures and perpetual futures, execute market and trigger orders, and enjoy between 1-150X leverage!