The difference between spot trading and contract trading!

The difference between spot trading and contract trading!

What is cryptocurrency contract trading?
A cryptocurrency contract is a contract that represents the value of a specific cryptocurrency. When you purchase a futures contract, you do not own the underlying cryptocurrency. What you have is a contract that says you agree to buy or sell a specific cryptocurrency at some time in the future.

What is cryptocurrency spot trading?
The spot market is where you buy and sell cryptocurrencies like Bitcoin and Ethereum with instant delivery. In other words, cryptocurrencies are transferred directly between market participants (buyers and sellers). In the spot market, you directly own the cryptocurrency and are entitled to economic benefits, such as voting for major forks or participating in staking.

What is the difference between cryptocurrency spot trading and cryptocurrency contract trading?
1. Leverage - Leverage makes contract trading extremely capital efficient. With futures contracts, you only need to invest a fraction of the market value of 1 BTC to open a contract position of 1 BTC. In contrast, spot trading does not offer leverage. For example, to purchase 1 BTC on the spot market, you would need thousands of dollars. In this case, assuming you only have 10,000 USDT available, you can only buy the equivalent of 10,000 USDT in Bitcoin.

2. Flexible choice of long or short positions - If you hold cryptocurrencies in the spot market, you can profit from the appreciation of your principal as the cryptocurrency you hold increases in value over time. In contrast, using futures contracts allows you to profit from short-term price fluctuations, whether prices rise or fall. Even if the price of Bitcoin drops, you can predict the decline and profit if the price continues to move lower. Futures contracts can also be used to avoid risks and extreme price fluctuations, making them an ideal option for miners and long-term investors.

3. Liquidity - The monthly trading volume of the cryptocurrency contract market reaches trillions of dollars, providing excellent liquidity. For example, the average monthly trading volume of the Bitcoin contract market is US$2 trillion, exceeding the trading volume of the Bitcoin spot market. Its strong liquidity facilitates price discovery and allows traders to trade in the market quickly and efficiently.

4. Contract vs. Spot Price - Cryptocurrency prices are determined by buyers and sellers through the economic process of supply and demand. The spot price is the current price for all transactions in the spot market. On the other hand, the contract price is based on the current spot price plus the contract premium. Contract premiums may be positive or negative. A positive premium indicates that the contract price is higher than the spot price; conversely, a negative premium indicates that the contract price is lower than the spot price. Changes in supply and demand may cause contract premiums to fluctuate.
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