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Trading 101: What Is Spot Vs Futures Trading?
Spot and futures trading have different pros and cons for those seeking to profit from the crypto markets.
Broadly speaking, there are two kinds of trading in crypto (and many other assets): Spot and Futures. Which one you choose will depend on your aims, expertise, and risk tolerance.
Spot trading entails buying an asset (e.g. stocks, commodities, or cryptocurrencies) with immediate settlement. The transaction is executed immediately and settled "on the spot", at the prevailing market price.
Spot trading entails physical ownership: That is, the underlying asset is actually exchanged, with the buyer gaining ownership and the seller transferring it directly to the buyer.
Spot prices are determined by the supply and demand available in the market. The price reflects immediate market conditions and is influenced by factors like real-time news, market sentiment, and order book activity.
Futures trading is somewhat different. These are contractual agreements that represent an agreement to buy or sell an asset at a predetermined price and specified future date. The transaction itself only occurs in the future.
Futures contracts are financial derivatives. Their value comes from the underlying asset, but the trader doesn't own the physical asset itself; instead, they are speculating on its future price movements.
Unlike spot trading, where the trader simply buys or sells the asset, futures trading typically involves the use of margin and leverage. This allows traders to control a larger position with a smaller upfront investment, and amplifies potential gains but also increases the risk of losses.
Futures prices are influenced by the spot market but are also impacted by additional factors such as time until expiration, interest rates, and expected future market conditions. The price of a futures contract can differ from the spot price due to these factors. The sophistication of futures contracts means that fees can be more complex, and can add up over time, while spot fees will be simpler to understand and predict.
Spot Or Futures Crypto Trading Platforms?
If you're a beginner crypto trader or investor, or want to buy BTC to hold yourself for the long term, then you're most likely better off buying from a spot exchange and withdrawing your coins to an external wallet you control.
If you're a more experienced trader who wants to use leverage and isn't concerned about physical ownership, then a futures exchange may be more suitable. Crypto derivatives make it easier to earn a return in a falling market.
Note: This distinction is also true for ETFs. A Spot ETF holds the underlying asset, and is directly influenced by the price of that asset on the open market. A futures ETF trades contracts for future settlement. As a result, it has a looser relationship with the spot market price, and the fee structure may be more complicated.
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