As the popularity of the cryptocurrency industry continues to grow, a large majority of people around the world now have wallets and own at least one form of cryptocurrency. Becoming a crypto owner is definitely not a difficult task; through simple participation in airdrops, one can gain access to free coins and tokens. However, there are other ways to gain cryptocurrency and reap splendid returns and this is through trading in cryptocurrency markets. 

There are various forms of cryptocurrency trading markets available on different exchanges and their utilization is largely based on the risk appetite and expertise of the trader. In the crypto space, various exchanges like Binance, Huobi Global, OKex, CoinTiger, and FTX offer the following options to interested crypto traders: the spot market, margin trading, and futures market. Due to the complexities and risks surrounding some of these kinds of trading options, the user is usually asked to watch tutorial videos on the topic and agree to various terms and conditions before being allowed to proceed to the market. 

Spot Market

Out of these three musketeers, spot trading or cash trading is the most common and involves medium risk and potentially high returns for the trader. Spot trading in cryptocurrency involves the purchase or the sale of a particular cryptocurrency for instant or immediate delivery to the buyer or seller at a specified date. This date is referred to as a spot date and the price of the cryptocurrency at the time is referred to as the spot price. This price is determined by the volume of buy and sell orders posted in the market order book.  

Every crypto exchange has a spot market as this market is necessary to fulfill its primary function of connecting buyers and sellers together to engage in transactions. The price values generated in spot markets are the foundation upon which derivative markets like the future, margin, and options market base off of. Trading on a spot market offers the trader the advantage of instant and accessible liquidity for his crypto assets as well as high returns when the trader utilizes the pumps and dumps of the spot price of the crypto asset in the market. The risk of losses in this market is relatively low and can be mitigated easily. 

Spot markets are however not the best option for speculative traders who wish to hedge on the prices of the crypto asset in the future. It also limits the trader’s ability and his profit to the value of his personally owned funds. A trader can only buy or sell as much as he is worth. To be able to trade successfully on the spot market, a trader would need to be able to merge and understand market indications derived from both fundamental and technical analysis of the asset.

Margin Trading

To buy and sell crypto assets on the spot market, a trader must have the capital or own 100% of the funds used in the trade. However, in the case of margin trading, the trader need not own all of the funds used. Whereas in spot trading if Trader A possesses $1000 and wishes to buy Ether (ETH) he can only buy as much ETH as $1000 is worth, in marginal trading Trader A can use $1,000 as collateral in order to leverage $3,000 worth of ETH. Essentially, the trader in marginal trading borrows funds from the exchange in order to increase his chances at a profit if the prices work in his favour. 

Referring to the example given above, the $1,000 relinquished by Trader A would serve as collateral and is usually referred to as the ‘margin’. This creates what is referred to as leveraged trading and the leverage describes the ratio of the borrowed funds to the margin value supplied. Therefore, in the example above, Trader A is marginally trading at a leverage of 3:1. Leverage values are determined by the exchange in which the trader seeks to initiate the trade. Crypto markets usually depict leverage ratios using the ‘x’ terminology. A 3:1 leverage value would therefore be depicted as 3x on most cryptocurrency exchanges like Binance. Binance offers from as low as 3x to as high as 10x leverage value.

Traders are allowed to open short or long positions depending on their speculations on how the price of the asset would go. However, if the asset market moves against the speculation of the trader to a certain degree, most times the exchange automatically liquidates the collateral of the trader or initiates a margin call requiring the trader to deposit more collateral into the margins account or face total liquidation. This is the major disadvantage of margin trading; it can lead to a total loss of assets even more than the initial collateral. 

Advantages still abound though. One major positive side to margin trading is that it grants accessible capital to trade and the trader has the ability to reap huge profits from the trade if the markets work in their favour. However, this type of trading is not for beginners and the faint-hearted. A proper understanding of the market structure and risk management strategies is a necessary toolkit for a trader who wishes to explore these waters. 

Futures Market

The futures market can be directly contrasted with the spot market. While the spot market involves the buying and selling of an asset with immediate delivery, the futures market as the name implies involves an agreement (futures contract) to buy or sell a crypto asset at a predetermined price and at a predetermined date in the future. Traders usually either go long or short on their speculations on whether the price of the asset would go high or go low and an expiration date for the contract is set. At the time of expiration, both parties are settled through physical transfer of the underlying asset or cash and the contract closes.

A key point to note is that the initial futures contracts only deal in the underlying price of the asset and not the asset itself. This is another distinction between it and the spot market that relies on the trader’s ownership of assets. When initiating futures contracts, traders can also use margin trading to increase their chances of profit at the expiration of the contract. Most exchanges offer various leverage values in this regard; Bybit offers up to 100x while Binance offers as much as 125x leverage value.

Exchanges offer various types of futures contracts but the most prominent is the perpetual futures contract which unlike the traditional futures contract has no expiration date. Traders continue to pay each other according to the price difference in the perpetual contract and spot price. The futures trading sphere offers advantages of high profit to the trader as well as the opportunity to enter the crypto market without needing to own any form of cryptocurrency at all. However, through the use of margins, traders could potentially be exposed to total loss of their assets if the speculated price does not get fulfilled. This kind of trading is therefore for only seasoned traders with experience in risk mitigation. 

So What’s The Take?

The world of crypto trading is like a gold mine and can be a life-changing experience for any crypto holder that seeks to increase their balance. However, the choice of which market or trading option to venture into should be heavily weighed against the capital of the trader, expertise, risk appetite, and risk mitigation skills. Due diligence is very necessary. 

The writer, Taiwo is a transactional legal practitioner in the Tech and IP space. She is glad to answer your questions and know your experience via the comment section below.

Do sign up for a KuCoin account.