There are basically three (3) types of cryptocurrency trading markets provided by the majority of the big cryptocurrency exchanges. These are –the spot trading markets, peer-to-peer trading markets, and derivatives or futures trading markets.
Let’s take a closer look at each of these cryptocurrency trading markets respectively:
- Spot Market
- Peer-to-Peer Market
- Derivatives, Futures, or Contracts Market
What is Cryptocurrency Spot Trading Market
The spot market is where cryptocurrencies are traded or exchanged for one another by and among individuals and institutional traders. The cryptocurrencies being traded on a spot market are paid for and delivered to the respective parties immediately as the deals are executed.
More so, the spot market, especially in traditional markets, is also referred to as the cash market. You can only trade on the spot market using your own funds with no leverage possibility – thus you must have adequate balances in one cryptocurrency to exchange for another – $1000 worth of Ethereum (ETH) for $1000 worth of Bitcoin.
What this means is that on the spot market, the users exchange one cryptocurrency against the other and the swaps are affected immediately orders are matched.
What is Cryptocurrency Fiat Trading Market
The major major fiat-based, peer-to-peer exchanges are Paxful and LocalBitcoins. However, in other to provide their numerous customers with more features and an easy means of buying and cashing out cryptocurrency some of the big cryptocurrency exchanges have introduced peer-to-peer markets where users can easily exchange cash for cryptocurrencies and vice versa directly with other members of the platform.
This move is a bid to drive mass adoption by making it easier for the general public to be able to access cryptocurrency and thus taking it mainstream. One major exchange leading the pack in this direction is Binance.
What is Cryptocurrency Derivatives Market
A derivative is a financial contract between parties that derives its value from an underlying asset –cryptocurrencies. More specifically, it is an agreement to buy or sell an asset at a predetermined price and a specified time in the future.
Derivatives do not have inherent or direct value by themselves; rather, their value is based on the expected future price movements of the underlying cryptocurrency –hence why it is called derivative.
The Derivatives or Futures market provides a means for cryptocurrency traders to make or lose money by speculating on the price of Bitcoin or any other cryptocurrency available to be traded without actually buying or holding the cryptocurrency itself.
When you long the market, you’re betting that the price of the cryptocurrency will increase in the future and when you short the market you’re betting that the price will fall. In whichever case, if your prediction is correct you make money and if wrong, you know what will happen –you lose money.
There are two (2) distinct derivatives contracts:
- Perpetual Contracts
- Futures Contracts
The only key difference between these two is that the perpetual contract, as the name suggests has no expiration or settlement period. You can hold onto a perpetual contract for weeks, months, and even years if you want.
However, you must note that depending on whether you are longing or shorting the market, you pay or receive what is called a funding rate usually +- 0.0100% every 8 hours for as long as your trade is open.
Futures trading is highly capital-efficient as you require relatively less amount of money to open positions compared to spot trading. This means that by taking advantage of the leverage opportunity provided in the derivatives market you can trade $15,000 worth of Bitcoin using $150 of your own money with a 100X leveraged position.
If your prediction is right you stand to make a whole lot of money and if you’re wrong, you can only lose as much as the $100 you staked on the trade.
Differences between the Spot and Derivatives Market:
- Trade Settlement Period –whereas in the spot market trades are settled instantly, in a futures market the trades are closed and settled at specified future date and price.
- Ability to leverage –You can trade futures with up to 100X leverage on some of the big exchanges like Binance and KuCoin whereas spot offers no such leverage opportunities.
- Different Prices –spot market price is always slightly different from the futures market price but at the date of settlement, both prices are harmonized.
In Summary
Very often new traders ask me – "which of the markets should I trade”?
The short answer is spot markets if you are looking to make longer-term investments. If you are hoping to make quick money by using increased leverage, you will want to trade the futures market; and if you are a total newbie looking to buy your first bitcoin or you got some that you want to convert to cash, then the peer-to-peer markets are your best bet.
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