What is the difference between crypto asset contract trading and crypto asset spot trading?
What is crypto asset contract trading?
In the contract market, you are buying and selling contracts that represent the value of a specific crypto asset. When you buy a futures contract, you do not own the underlying crypto asset. Instead, you own a contract that agrees to buy or sell a specific crypto asset at a future date. Therefore, owning a futures contract does not provide you with any financial benefit, such as voting rights or pledges of interest.
A crypto asset contract provides protection against price fluctuations and adverse price movements of its underlying asset. In addition, it serves as a proxy tool for traders to speculate on the future price of a particular crypto asset.
With contracts, you can take advantage of price fluctuations. Whether the price goes up or down, contracts allow you to easily participate in the volatility of crypto assets. In other words, you can trade speculatively on the price of a crypto asset without having to buy the underlying asset itself.
If you think the value of an asset will rise, you buy the contract and go long, and if you think it will fall, you sell the contract and go short. Your profit or loss depends on the outcome of your prediction.
Derivatives trading platforms such as the Cryptocurrency Contracts Trading Platform facilitate the trading of derivatives such as crypto asset contracts. Just like spot trading platforms, derivatives trading platforms are open 24/7. The main difference between spot and derivatives trading platforms is that derivatives trading platforms require protection and risk management mechanisms such as insurance funds due to the complexity of their products.
What is crypto asset spot trading?
Crypto asset spot trading is the process of buying and selling digital assets such as bitcoin and ethereum and delivering them instantly. In other words, it is the process of transferring crypto assets directly between market participants (buyers and sellers). In the spot market, you have direct ownership of crypto assets and legal rights, such as voting on major forks or participating in equity pledges.
Trading platforms, including Cryptocurrency, facilitate spot trading activities, enabling users to conduct fiat-crypto-asset and coin-cryptocurrency transactions. Spot trading platforms act as intermediaries for buyers and sellers to buy and sell crypto assets. The trading platform facilitates transactions when the buy and sell prices match. Spot trading platforms are open 24 hours a day, 7 days a week, which means you can buy and sell crypto assets anytime, anywhere.
Let's look at an example of a trading platform.
Let's assume for a moment that you want to buy Bitcoin in fiat currency (USD) on the spot market. In this case, you would go to the crypto asset spot market to find a bitcoin/USD pair and place a buy order at the price and quantity you expect. Once the transaction is completed, your bitcoins are stored in a spot wallet and you can hold them until they appreciate in value. Or, you can exchange them for other tokens that you think will appreciate in value.
What are the differences between trading crypto asset contracts and trading crypto asset spot?
Leverage - Traders are attracted to the contract market because of the leverage. Leverage makes contract trading extremely capital efficient. For example, to buy 1 bitcoin in the spot market, you would need several thousand dollars - $50,000 based on the current market price. With contracts, you can open a bitcoin contract position at a very low cost. This is only possible with leverage. The higher the leverage, the less you have to invest in a given position. In contrast, spot trading does not offer leverage. Let's say you only have 5,000 TEDA coins. In this case, you can only afford to buy 5,000 TEDA worth of bitcoins.
Flexibility to go long or short - When you buy bitcoins in the spot market, you can only profit if the price goes up. However, you don't make money in a bear market. Contracts will allow you to profit from short-term price movements in both bear and bull markets. Even if the price of bitcoin falls, you can still trade with the trend. With contracts, traders can develop complex trading strategies such as short selling, arbitrage, pair trading, etc. In addition, contracts are used to hedge against downside risk and protect portfolios from dramatic price fluctuations. Miners and long-term holders often use contracts to protect their portfolios from unexpected risks.
Liquidity - The contracts market provides trillions of dollars of deep liquidity each month. For example, the Bitcoin contract market has an average monthly trading volume of $2 trillion, much higher than that of the Bitcoin spot market. Its strong liquidity supports the price discovery process and allows traders to trade quickly and efficiently in the market. There is also typically less risk in a liquid market, as there is always someone willing to take the other side of a given position, and traders will incur less slippage.
Contracts vs. Spot Price - The price of crypto assets in the spot market is the market price of all spot transactions, which is known as the spot price. Buyers and sellers determine the spot price of a crypto asset through the economic process of supply and demand. In contrast, the contract price is determined based on the current spot price plus the cost of holding during the pre-delivery transition period. The basis spread represents the cost of holding the contract. Basis spreads can be positive or negative. A positive basis spread relationship is one in which the contract price is higher than its spot price; and vice versa. The basis spread may fluctuate due to changes in supply and demand, but will eventually go to zero at maturity due to the power of arbitrage.