What is spot and futures trading on cryptocurrency exchanges. Examples of derivatives and spot exchanges
Newbies often have a question – what is spot and futures trading, what is the difference between them and in what cases one or another trading method is used. The editorial staff of Btcnewsweb.com proposes to consider the features of both options, we will also give examples of cryptocurrency exchanges that support work with spot and futures transactions.
Although spot trading is recommended for novice traders, as a simpler and more understandable option, the cryptocurrency derivatives market is also actively developing. In just a few years, it has grown exponentially, many spot exchanges have launched a section or even a separate platform with futures. As a result, trading volumes in these areas are increasing at a rapid pace.
Read Also: Best Cryptocurrency Futures Exchanges.
Fundamental differences between futures and spot trading
In the case of cryptocurrencies, spot trading is really the simplest thing to start with. In essence, this is buying a cryptocurrency (say, Bitcoin) and holding it in your account until the rate grows for a profitable sale. For each operation, the exchange takes a commission, the amount of which usually depends on which “side” of the market in this case the user belongs to:
- Makers. The commission for them is low or zero, and on some sites even negative (the so-called rebate). Market makers create limit buy or sell orders, indicating the desired transaction price. Thus, they form the order book, that is, in fact, “make the market”. Hence the more loyal conditions for them.
- Takers. They create market orders without specifying the buy or sell price, thereby closing the existing limit orders.
The futures market also has such concepts. However, derivatives trading differs significantly from spot trading, and the main difference is that the trader does not need to actually own the asset.
Let’s take a BTC / USD contract as an example. By trading this futures, you are not actually buying or selling bitcoin. However, the value of the contract is as close as possible to the value of bitcoin, so as the rate of BTC rises or falls, the value of the contract also changes. Hence, you can profit from Bitcoin price changes without ever buying or selling Bitcoin. You can also characterize this process as follows: you bet on the rise or fall of the asset, and the profit depends on how accurate your forecast is.
Statistics show that investor confidence in derivatives continues to grow, some do not even trade on the spot market at all, but only use derivatives. One of the advantages is that they can be used to hedge risks in such a volatile and unpredictable crypto market.
Which market is better to trade, spot or futures?
The answer depends on your trading needs. In short, spot markets are fine if you want to make long-term or medium-term investments. If you want to trade actively, making a profit from each transaction, using increased leverage and at the same time hedging risks, then futures.
Features and examples of spot exchanges
The main characteristics of spot trading:
- Accurate cryptocurrency rates are used, which directly depend on the ratio of supply and demand in the market.
- Instant settlement of trades as soon as two matching orders are matched on similar conditions.
- Trading in the spot market is often slower and more expensive, and profit is a rather vague concept.
Examples of spot cryptocurrency exchanges:
- Binance. Has been working since 2017. 1039 trading pairs. The volume of trades in 24 hours is $ 45,267,511,850.
- Huobi. Has been working since 2013. 898 trading pairs. The volume of trades in 24 hours is $ 13,885,895,615.
- OKEx. Has been working since 2013. 506 trading pairs. Trading volume for 24 hours $ 11,018,253,836.
- Currency.com. Has been working since 2019. 442 trading pairs. The volume of trades in 24 hours is $ 166,271,198.
- EXMO. Has been working since 2013. 184 trading pairs. Trading volume in 24 hours $ 112 103 286.
Features of derivative contracts and examples of futures exchanges
Key features of futures trading:
- Prices differ from spot prices due to additional costs: storage costs, taxes and damages, if any, costs of blocking funds, etc. To match the spot as closely as possible, prices in the futures market are adjusted from time to time (this is called funding, usually every 8 hours).
- A specific settlement date has been set for the underlying asset. The trader agrees to buy or sell a contract at some point in the future. The contract can be extended or canceled.
- More structured approach, lower delays, and higher leverage than spot.
There are several different types of derivative (derivative) contracts. Let’s talk about the main ones.
Futures – allows a trader to enter into an agreement regarding the purchase and sale of cryptocurrency at a pre-negotiated price and at a specific time.
Perpetual contracts are the same as futures, but without an expiration date. They act endlessly. The price is closest to the base one.
Swaps are the exchange of one financial instrument for another at a given point in time.
Options are similar to futures with the difference that they give the trader the right, not the obligation, to repurchase the asset.
Examples of derivative cryptocurrency exchanges:
- Binance Futures. 162 contracts. The volume of trades in 24 hours is $ 83,421,342,003.
- FTX Derivatives. 1046 contracts. The volume of trades in 24 hours is 15 563 413 105 $.
- Bybit. 15 contracts. The trading volume for 24 hours is $ 17,200,749,478.
- Bitmex. 92 contracts. Trading volume in 24 hours $ 4,383,268,388.
- Deribit. 41 contracts. The volume of trades in 24 hours is 2 865 412 187 $.
To summarize: In the cryptocurrency spot market, investors own, buy and sell actual coins. This is the underlying marketplace where cryptocurrencies are exchanged. In the crypto derivatives market, investors enter into a contract to buy a coin at a predetermined price and at a specific time in the future. Derivative contracts can be futures, perpetual contracts, swaps or options, but they all derive their value from the value of the underlying asset.
Spot trading is easier for a beginner to learn, but futures trading is more effective for professionals, it allows not only making a profit, but also minimizing risks. The futures market can help hedge the risks of adverse price movements in the spot markets. Therefore, the relationship between spot markets and the futures market is not competitive, but quite the opposite.