Crypto Academy Week 3 Homework Post for Crypto Professor @besticofinde: My Understanding of Spot and Margin trading
As crypto continue to gain acceptance in the business sphere with more merchandising options available with crypto as means of exchange for product/services, it becomes imperative to hold your digital asset in the most readily spendable crypto. Moreover, the volatile nature of cryptocurrencies poses a risk to traders. As such, the need to hold assets in the most nearly stable crypto.
Source: https://pixabay.com/photos/financial-planning-report-chart-3207895/
I remember once buying $300 worth of STEEM, far back 2018 when STEEM was still valued around $1.5 each. Just few days afterward, the value of STEEM started depreciating. I hoped a rebound in price soon but the reverse was the case which finally took STEEM to $$1 and even less. That was the beginning of my panic experience with crypto experience. I got more scared the more the token continued to dip in price as I couldn't help myself. It took virtually a year after to have recovered the investment and that happened via Steem-engine tokens then.
The messy experience I just shared above happened because I had failed to understand what trading is and how it could have salvaged the situation. I never even knew of Binance nor how I could use the exchange to trade my assets. Now, I can't endear myself into such a heartbreaking experience because I've learnt to spot trade my crypto.
Q.1a) My understanding of Crypto Spot-trading
At this juncture, I would define spot trading in my own understanding and words as the exchange of a certain USD value of crypto A to the same USD value in crypto B such that I can retain its value for ease of spending or hodling at a particular time. It is important to note that the quantity of crypto A and B may differ greatly depending on their individual worth against USD. That means that If I spot-trade 10 quantity of crypto A worth $5 each to cryto B worth $1 each, I will end up having 50 quantity of crypto B but retaining the same USD value as A.
A screenshopt of spot trading STEEM and ETH on Binance
To my understanding, spot trading is a less risky trading option for cryptocurrency. The tendency for profit is based on a user's knowledge of growth drivers of a particular crypto which would stabilize the crypto price or have the price go forward. It is important to note that most time, what a trader puts in from one end of the crypto is what he gets at the other end.
Q.1b) My understanding of Crypto Margin-trading
Sometime during December 2020, I noticed how a Steem friend would not be making poss often but his purchasing power wouldn't reduce and I know his only source of income is crypto. On querying, he told me how he now makes some money from futures trading and it got my interest. I researched further and then, I started appreciating Margin trading.
Binance.com defines margin trading as a method of trading assets using funds provided by a third party. This means that a user with some limited funds that would have organically made insignificant profit/loss for buying and selling crypto is now granted access to more funds by a third party, to make the trade outcomes more profitable. This is known as leveraging. This option of trading is more based on the probability of assurance of the possible price moves of a certain crypto and a response to that.
A screenshopt of Futures trading of BTC versus USDT on Binance
Margin trading allows the traders to leverage on fat sum of monies that are not theirs. They are able to realize larger profits on successful trades as long as they can predict right the direction of the crypto price. Margin trading also has application in low-volatility markets, such as the international Forex market. A trader must be able to identify the mutual relationships between cryptos. That is, each margin trader should know for example what direction ETH would go when BTC pumps or dumps respectively.
Q.2a) Advantages and Disadvantages of Crypto Spot-trading
With my 2 year experience in spot trading in Binance and other CEXes and DEXes, the following are my identified advantages and disadvantages of Crypto spot trading.
| Advantages of Spot-trading | Disadvantages of Spot-trading |
|---|---|
| - Less risky trading option | - Small profits |
| - Loss may be low | - Requires huge start-up capital |
| - Easy to understand | - Required pair may not be available |
| - Indecision can be easily revoked. | - May take a long time to mature |
| - Trading commissions are low |
Q.2b) Advantages and Disadvantages of Crypto margin-trading
With my few months of experience of margin trading in Binance and other CEXes and DEXes, the following are my identified advantages and disadvantages of Crypto margin trading.
| Advantages of margin-trading | Disadvantages of margin-trading |
|---|---|
| - Quick way to become rich in crypto trading | - Highly risky crypto trading option |
| - Comes with huge profits when predicted right | - Losses may be high |
| - Requires a small start-up capital | - Trading commisions vary with volume. |
| - No need for huge knowledge on token pairs. | - May lead to liquidation of capital. |
| - May yield big in a short time. | - It's complex for new users. |
My Advice for new Crypto traders
- Always invest what you cna afford to lose.
- Do your own research and get convinced before investing in any crypto.
- Learn to take profit at safe levels.
- avoid greed. Set daily or weekly goals and stick to them.
Thanks to Professor @besticofinder for this awesome and revealing lecture on Spot trading. It was great being a part of this week's lecture.
Thank you all for reading through my blog. feel free to ask question in the comments section too..