Spot Trading vs. Futures Trading: A Simple Guide

What is Spot Trading?

Spot trading means buying or selling cryptocurrencies for immediate settlement. You exchange one cryptocurrency for another and actually own the crypto you buy.

What is Futures Trading?

Futures trading doesn't involve trading the cryptocurrency itself, but rather futures that represent the cryptocurrency. Holding a futures means you agree to buy or sell the underlying cryptocurrency at a future point in time.

Differences between Spot and Futures Trading:

1. Leverage:

• Spot Trading: You trade with the same amount of money as the value of the asset.
• Futures Trading: You can use leverage to amplify your investment, trading with more money than you actually have. This can lead to higher potential profits but also higher risks.
• Example: If Bitcoin (BTC) is priced at $65,000, buying 1 BTC on the spot market requires $65,000. On the futures market, you can open a position with 100x leverage, meaning you only need $650 to buy 1 BTC.

2. Long and Short Positions:

• Spot Trading: You can only buy (long) assets, profiting when the price goes up.
• Futures Trading: You can both buy (long) and sell (short) assets, allowing you to profit from both rising and falling prices.

3. There are further differences between a perpetual futures market and a traditional futures market.

To open a new trade in a futures exchange, there will be margin checks. There are two types of margin:

• Initial Margin: 

This is the amount of money you need to deposit to open a position.

• Maintenance Margin: 

If your account balance plus unrealized profits falls below this level, your position will be automatically closed (liquidated). You can close your position before liquidation to avoid fees.

Important Note:

The price of a futures may differ from the spot market price due to the cost of holding the position. LBank uses a 「Funding Rate」 to help align the prices of spot and futures markets over time, but short-term differences can still occur.