Homework Task 3 : Explain Spot Trading and Margin Trading, and the advantage and disadvantage
Hello Steemians. In this homework, I explain to you about the Spot Trading and Margin Trading. Many traders especially newbies , don't know how to trade after registering on any of the Crypto platform for and example Binance and Coinbase. This post will covered the homework task3 that is given by professor @bestifocinder below.
(1) Explain Spot Trading and Margin Trading
(2) Discuss the advantages and disadvantages of Spot Trading and Margin Trading
Let's Get Started...
When it has to do with Cryptocurrencies, Spot trading is the most essential type of Investment you can easily make. In a nutshell, It means the underlying market where Cryptocurrencies can be exchanged.
As the name suggests, spot trading takes place in the spot market at the spot (aka current) price. With spot trading, you are essentially executing a trade at the immediately available asking and bidding price that market participants are asking for. And because of the immediate nature of spot trading, you will need to have the available assets to pay for your trade by the date of settlement.
For example you buy $2,000 worth of Bitcoins with spot trading, you will need to have a balance of $2,000 in your account by the time you want to settle your debt, It is usually 2days of trade. Or else, the exchange will not allow you to enter into another Bitcoins trade.
Margin trading is the type of trading that has to do with borrowed money. As a trader when you buy and sell cryptos with borrowed money, it simply means that you are going into debt to invest. In Margin Trading if you are taking a loan to buy Cryptocurrencies or any assets the platform/brokerage will take full control of your investment. Margin trade is similar to Spot Trading all that is required is collateral of assets that is equivalent to what you intend borrowing.
Let's say that for instance, you took a loan to buy $2,000 worth of Bitcoins from Binance. In this case Binance will provide you with a leverage of up to 200x on crypto assets, this simply means that you will only need to to have $20 available bin your account to trade with the $2,000 worth of Bitcoins.
This mean that you would only need to keep 2% (at 200x leverage) of the agreement amount in yours account balance to keep the trade open. You can also withdraw your profits or get into more contracts depending on how good your trade is.
Advantage Of Spot Trading
For starters, spot trading helps you manage your risk. Since you can only trade the balance that you own, you will not end up losing more than what you already have in your account. Spot trading ensures that you only trade based on the assets that you own and avoid over-leveraging.
Disadvantage Of Spot Trading
The advantage of spot trading of managing risk can be a downside in itself in some situations. Because you are only limited to the balance in your account, you cannot take full advantage of good trading opportunities. Thus, even if you have a trade that you have a strong conviction, you can only make as much money as allowed by the capital you own. With only US$1,000, there is only so much you can make with the US$1,000.
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Advantage Of Margin Trading
The biggest advantage of opting for margin trading is the opportunity to amplify your profits. Having the leverage element in margin trading lets you trade as much as 100x of your capital on crypto instruments. With margin trading, a good trade at the right moment can yield you a lot of returns.
Depending on your trading style, having margin trading can be a huge advantage for you. Take low frequency traders for example. Low frequency traders only enter into positions that they are really sure of. Margin trading lets them take full advantage of the low frequency but high probability trades that these traders have identified.
Disadvantage Of Margin Trading
There is inherent risk involved in margin trading. As you can imagine, trading up to 100x of your capital makes it possible for you to lose more money than your initial investment. This is unlike spot trading where you can only lose as much as the capital that you have.
When trading on margin, your position may be liquidated if you do not have enough margin to support the losses on time. Thus, another factor to think about is the interest on your position, which is an uncertain amount depending on the direction of your position and the platform you choose.
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Thank you for reading this post. I hope, It's helpful to you