What’s the difference between Spot Trading and Derivative Trading?
If you follow the cryptocurrency space from time to time, you would have come across two different terms from time to time – spot and derivative. Both “Spot” and “Derivative” are forms of trading which allows investors to book profits.
In this article, we will take a look at what these forms of trading are and how do they differ from each other.
Cryptocurrency Spot Trading
When it comes to cryptocurrencies, spot trading is the most basic type of investment you can make. This essentially entails purchasing a crypto such as Bitcoin and holding it until the value increases or using it to buy other altcoins that you believe may rise in value.
At any point, you can decide to trade (buy/sell) any of these currencies against USDT depending on the trends you see or the strategies that you have. Here the crypto is yours and you can use it any way you seem fit.
Benefits of Spot Trading –
- You physically own a particular amount of crypto in your crypto wallet.
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Cryptocurrency Derivative Trading
Derivative Trading(aka trading of contracts) is a bit different than spot trading as you do not actually need to own the underlying asset. For example, let’s consider a BTCUSD contract. When trading this product, you are not actually buying or selling Bitcoin itself. However, the value of the contract is designed to follow the price of Bitcoin. This means that as the value of Bitcoin rises or drops, so does the value of the contract. In this way, you are able to benefit from the price movements of Bitcoin without actually ever having to buy or sell Bitcoin.
Of course, there are many more complexities involved in the trading contracts, but the fundamental idea is that you bet on the price of an asset such as Bitcoin either going up or down. Whether you profit or lose will depend on the accuracy of your prediction.
Benefits of Derivative Trading –
- Cryptocurrency derivatives provide the highest liquidity (the highest trading volume), compared to any other crypto market in the world.
- Cryptocurrency derivatives you can easily sell short. This single factor is extremely important for active traders. In a short, a trader makes money when the price of an asset falls.
- You do not have to physically own a particular amount of crypto in your crypto wallet to enter a trade on a derivatives market. Derivatives are created in the form of contracts that allow you to speculate in crypto’s price without owning the crypto itself. This means the contract can be cheaper than the asset price.
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While both forms of trading provide an opportunity for profits, seasoned traders are far more willing to trade in derivatives, because they can more easily manage their risk, trade at a lower cost and with less capital, and go short more easily.
Disclaimer: Blockmanity is a news portal and does not provide any financial advice. Blockmanity's role is to inform the cryptocurrency and blockchain community about what's going on in this space. Please do your own due diligence before making any investment. Blockmanity won't be responsible for any loss of funds.
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