When participating in the crypto market, you must have heard like: trade, hold, sport, and futures… So how many types are there, and which ones will you apply to make a profit? If you are a newbie and don’t know the above categories correctly, this series is for you. In this series, I will provide information to understand how to trade, basic technical analysis, and choose for yourself spot or futures trading. With the hope that you will have an overview to get started with this market.
Understand what spot trading is?
In cryptocurrency spot trading, you trade buy and sell cryptocurrency pairs on CEX or DEX exchanges. You intend to profit from this buying and selling action. Sometimes it is also a take-loss action, as crypto pairs run out of your control. In other words, cryptocurrencies are circulated directly between market participants (buyers and sellers). In this trading method, individuals use different timeframes to seek profits, usually medium and long-term timeframes.
The spot exchange acts as an intermediary for buyers and sellers to bid and sell the crypto assets they want. The exchange will immediately execute the transaction when a sell or buy price is matched. The spot exchange operates 24/7, allowing users to buy and sell cryptocurrencies at any time on any day.
Ways to place spot orders
Limit: A Limit order is an order to buy or sell an asset at a price specified by you. Limit orders can be appropriate when you think you can buy at a lower price or sell at a higher price than the current price.
- If the order is matched at the price range, you place the order. Limit orders are executed.
- If the order is not matched at the price range, you place the order. Limit orders will not occur.
Market: A Market order is an order to buy or sell an asset at the current market price. A Market order usually guarantees execution, but it does not guarantee a specific price. Market orders are often appropriate when you want immediate execution.
Stop limit: A stop-limit order is a limit order that has a stop price. When the stop price is reached, it triggers the limit order. The limit price is the specific price of the limit order the stop price triggers. Once your stop price has been reached, the limit order is immediately placed on the order book.
- Stop Price: When the price reaches a stop price, a Stop Limit order will be executed to buy or sell the asset at a certain limit price or better.
- Limit Price: The selected price (or possibly better) at which the Stop Limit order is executed.
Understand what Futures trading is?
Unlike spot trading, you can only buy or sell, profiting from price increases. With futures contracts, you can take advantage of price fluctuations. Regardless of whether the price is up or down, futures contracts allow you to participate in cryptocurrency movements with ease. In other words, with futures, you make predictions about the price of a cryptocurrency instead of actually buying an underlying asset.
If you expect the value of an asset to increase, you will buy a futures contract to go long (buy), and if you expect it to decrease, you will short (sell). The possibility of profit or loss will depend on the outcome of your prediction.
Leverage: Leverage makes futures trading extremely capital efficient. If you have 3000 Usdt and want to buy 1 BTC, this is possible using leverage. In this case, you use leverage x100: 3000*100=30,000. So you were able to use 1BTC while only having 3000 usdt.
- Cross: shared between open positions with the same settlement cryptocurrency. When needed, a position will draw more margin from the total account balance of the corresponding cryptocurrency to avoid liquidation.
- Isolated: is assigned to a position is restricted to a certain amount. If the margin falls below the Maintenance Margin level, the position is liquidated. However, you can add and remove margin at will under this method.
Different between Futures and Spot
Flexibility – In the spot market, you only make a profit if the price rises. However, futures allow you to profit from price movements regardless of whether the market is up or down.
Liquidity – The futures market offers deep liquidity with a monthly volume of trillions of dollars that is much larger than the trading volume of the spot market. A highly liquid market is generally less risky because there is always someone willing to take the other side of a given position and traders will experience less slippage.
Futures Price vs Spot Price: The price of cryptocurrencies on the spot market is the price that applies to all spot trades. Buyers and sellers determine the spot price through the economic process of supply and demand. In futures prices are based on the spot price plus the cost of holding in the interim prior to settlement. The cost of holding a futures contract is represented by the basis, which can simply be understood as the difference between the spot price and its futures price.
Basis can be a positive or negative number. Positive basis represents futures price is greater than spot price and vice versa. Basis can fluctuate due to changes in supply and demand, but under the influence of arbitrage, it will eventually fall back to zero at contract expiration.
Verdict
Spot trading is an easy-to-understand and intuitive option for most beginners. Therefore, it is also a suitable choice for users who are just starting to trade cryptocurrencies. However, futures trading also has advantages in investment strategy and allows you to maximize profits. Futures trading can be profitable if you have the right knowledge and risk management techniques to avoid huge losses. So with the above information, you can distinguish what is the spot, what is the Futures and the difference between these two types. In the next sections, I will go through each type and how to trade a spot and futures order. Hopefully, with this information, it can help you better understand when participating in the market.
If you have any questions, comments, suggestions, or ideas about the project, please email [email protected].
DISCLAIMER: The Information on this website is provided as general market commentary, and does not constitute investment advice. We encourage you to do your own research before investing.
Alan
Coincu Ventures
