Deciding between margin trading and futures contracts requires a careful analysis of these two financial tools. Let’s take a closer look at these instruments and find out which one could meet your needs.

Making the right choice

As always, the best choice is tailored to the specific circumstances. Traders can use margin or future trading depending on many factors: their portfolio, market situation, etc. So it might be a good idea to be prepared to use both of these tools, mixing them and making the most profit from your trading. To achieve this, a clear comprehension of the functionality and potentials of margin and futures trading is essential.

Features of margin trading

Margin trading occupies an important position in the realm of cryptocurrency exchanges. It suggests the execution of trades based on credit. Investors engage in transactions not with their own capital but instead use leverage loans from the exchange. 

The main features of this strategy: 

1. Credit relationship. The investor immediately enters into a credit relationship with the exchange or broker. 
2. Leverage. The buyer of an asset is not its 100% holder. Margin trading allows you to make more pricey transactions at the expense of a borrowed loan – leverage. This mechanism allows the trader to open a trade, despite the fact that there are not enough funds in his account.
3. Greater risks. A trader who makes transactions in margin trading gets the opportunity to both earn more and lose more. The greatest potential profit appears when working with long positions.

Short and long positions in margin trading 

Margin positions are divided into two types: short and long.

• Long positions represent a strategy centered around anticipating of asset growth. The concept is straightforward: traders acquire a promising asset that is predicted to rise over time. When executed correctly, the resulting profit offsets all expenditures, including any credit utilized.
• The short position embodies the art of capitalizing on a declining market. A short trade typically involves selling a cryptocurrency that the trader does not currently possess (obtained on loan from an exchange), with the intention of repurchasing it at a lower value later on. 

Future contracts and its principles

A futures contract is a pact wherein the purchaser commits to buy, and the seller agrees to vend an asset on a predetermined future date, at an established price upon inception. Such a contract is a derivative of the underlying asset, so its price depends (although it may differ) from the value of the underlying asset. Crypto derivatives, in particular, constitute agreements between buyers and sellers concerning the forthcoming value of an asset. Such contracts make it possible to trade crypto without actually buying the asset.

The realm of futures trading acts as a shield against adverse and abrupt market fluctuations, particularly applicable to the capricious nature of cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH). By resorting to futures, entrepreneurs navigate with greater ease through the realm of volatility. To embark on a futures market position, an investor is mandated to furnish a margin deposit. This is the amount that, in case of failure of the transaction, will cover all its costs.

Analogous to margin trading, futures trading heavily hinges on asset price predictions. This once again highlights the significance of comprehensive market insight, quick decision-making, and adept risk computation in these strategies.

What is the difference between margin trading and futures trading?

Let’s discuss differences between these two strategies:

1. The amount of leverage. In margin trading, it can reach a maximum position of 10x, while in futures it can go up to 125x. The amount of leverage is determined by the ratio of the amount of borrowed assets to the amount allocated by the trader for the deal. For example, if the leverage value is 10x, then if an investor has $1,000, he can open a trade for up to $10,000.

• Different markets. Margin trading is conducted on the spot market, while futures trading is located on the crypto derivatives market. C
• Fees. Usually, the commission in the margin trading is higher than the commission on the futures market. This can be happening due to the fact that in the margin strategy an asset is transferred from the seller's wallet to the buyer's wallet, while with futures contracts there’s no need to do this.

What is better: margin or futures trading?

As we have already mentioned, these two strategies can be mixed together. Traders should make a choice based on the market situation, deep analyses of assets and their previous experience. Although investors find margin trading and futures very attractive due to their potential returns, they should be careful and take into account all the risks before using these tools. Always do your research before making any financial decision.

Have you ever used one of these strategies? Share your experience in the comments! 

If you want to learn more interesting facts about crypto then check out our blog! You might like our articles “How to Invest in Crypto Without Buying It” and “How to Become a Cryptonaire”.

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SimpleSwap reminds you that this article is provided for informational purposes only and does not provide investment advice. All purchases and cryptocurrency investments are your own responsibility.