Crypto Derivatives vs. Spot Markets

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Coinrule

6 min readMar 11, 2022

The cryptocurrency market is hugely diversified with a large list of options available to anyone looking to dive into the sector. Examples of such options are spot and crypto derivatives trading. The spot and derivative markets are core venues for trading traditional and digital assets. Here, we will briefly discuss their perks and how you can leverage either of them to step up your trading game and trade like a pro.

What is Crypto Spot Trading?

Spot Trading is the process of buying and selling cryptocurrencies — such as Bitcoin and Ethereum — stocks, bonds, commodities for instant delivery. The spot market plays a crucial role in crypto adoption, as market participants directly own the cryptocurrency assets and can participate in voting or staking. Traders also benefit from holding cryptocurrencies when their spot prices increase over time.

Note: Spot Price is the current market price of a digital currency.

What is Crypto Derivative Trading?

Crypto Derivatives Trading is the process of creating financial contracts between two or more people to derive from an underlying asset on a predetermined future date. Traders use derivatives (financial contracts) to speculate on the future price of an asset, without owning the asset outright, in hopes of booking a profit. There are four types of traders in a derivatives market: margin traders, speculators, arbitrageurs, and hedgers, while derivatives contracts include futures, forward, options, and swaps.

The main difference between spot and derivative trading is spot prices. Buying and selling in the spot market require an immediate response, while derivative contracts delay payment and delivery to predetermined future dates, however perpetual contracts do not have any expiry date and are the most common type of derivative product on crypto exchanges. The ability to short (sell) an asset, with the aim of buying it back at a lower price, without having to own it outright is a major attraction for experienced traders and institutions who want to hedge their large position against any potential downtrends. This is also attractive for regular traders who can use this strategy to not incur capital gains taxes of selling assets and positions that they have accrued large amounts of profit on, but want to minimise their downside risk.

The markets are still evolving and growing at an increasing pace with the inclination that mainstream adoption is spreading within financial institutions, individuals (newbies and veterans), and businesses getting involved in different ways. However, the extra attention and increased performance may attract adverse government regulations and certain restrictions.

Use of Leverage for Derivatives (Pros and Cons)

Traders who use leverage for derivatives purchase assets on a margin. Traders borrow money to increase their buying power in the market by upping their position size. For example, if you were trading spot with $10,000, your position size would remain $10,000 with a 10% move to the upside resulting in a profit of $1,000. Using 10x leverage within the derivatives market will result in the original $10,000 position size increasing to $100,000, with the 10% move to the upside gaining a $10,000 profit. While this may seem favourable initially, it also comes with significant risks. Let’s look at the pros and cons of using leverage.

Pros of Leverage Trading

Magnified profits.
Access to high-value assets or stocks.
Capital efficiency — allow you to gain more exposure to the market without requiring additional capital.
Ability to hedge your portfolio and positions.

Cons of Leverage Trading

Higher fees — Leverage trading comes with borrow fees and margin rates that can negate profits.
Magnified losses — Any trader using leverage in derivatives is susceptible to losing capital and potential profits due to their increased position size.
Without effective risk management knowledge and understanding, traders are vulnerable to losses larger than they expect and can ruin their portfolios.

Best Platforms for Spot Trading: Binance and Kraken

Spot Trading platforms serve as intermediaries for buyers and sellers that transact digital currencies. Over the years, Binance and Kraken have proven to be the leading exchanges for spot trading.

Binance

Binance is a verified crypto trading platform with flexible services for traders. It facilitates spot trading activities by enabling users to enjoy fiat-to-crypto and crypto-to-crypto transactions. It is perfect due to the large amount of options and settings available, however it can be seen as less attractive to beginners from a user-friendly perspective due to the variety of settings. However, the layout can be adapted to a more simplistic style by selecting “Binance Lite” settings to suit newcomers.

Its trading fees range from 0.02% to 0.10% per trade and 3% to 4.5% for debit card purchases. Binance supports over 350 coins, uses cold storage, and requires a 2FA verification to enable usage. Transaction limits differ based on the cryptocurrency. The mobile app is available on the Apple store and Google Play store.

Kraken

Conversely, Kraken is one of the top-performing crypto exchanges that allow users to transact different cryptocurrencies. Users can buy, sell, receive, send, swap, and more. Anyone on the platform can also use fiat currencies such as USD, CAD, and GBP to validate transactions. It supports over 120 cryptocurrencies, uses air-gapped cold storage, SSL encryption, API key permission control, and requires 2FA withdrawal email confirmation for withdrawals. The maximum trading amount is $100,000, and it is available on Apple and Google play store.

Best Platforms for Crypto Derivatives: Binance Futures and Bitmex

Crypto derivatives trading platforms are more flexible than spot trading platforms, as they have a robust list of accessible markets. Derivatives are a standard financial product traded on several crypto exchanges: centralized and decentralized platforms or over-the-counter. Consequently, Binance Futures and Bitmex are our best picks because of their differing styles towards derivatives trading.

Binance Futures

Since its inception, Binance Futures has recorded a remarkable influx of users and a trading volume counting billions of dollars. It has also grown into one of the leading crypto derivatives exchanges with Bitcoin / USDT Perpetual, Ethereum / USDT Perpetual, and LUNA / USDT Perpetual being the most highly traded pairs with 200 derivative pairs being supported in total. The platform has a low-fee mechanism and allows users to trade limited volumes anonymously. But it doesn’t support fiat payments and is unavailable in some countries, including the United States of America.

Bitmex

Bitmex is a reliable platform in the crypto industry with relatively low trading fees and is best suited for crypto veterans and institutional investors. This is due to it not being as intuitive for beginners without prior trading expertise. It has a limited list of supported cryptocurrencies with 49 pairs being supported and occasionally experiences system problems. BitMEX has also received numerous lawsuits, from former customers, for money laundering, market manipulation, and non-adherence to international compliance laws. However, the platform has progressed by improving their credibility and reputation by introducing identity verification for all users and other compliance adhering measures as the first step towards rebranding.

Conclusion

Crypto trading comes with an avalanche of risks, especially for beginners. Whether you want to plunge into spot trading or derivatives trading, being a successful trader depends on your level of knowledge and skill-set. The most important when using leverage is risk management, with the capital preservation being the main trading priority through risk minimisation, followed by the aim of growing it. Thus, remaining committed to continuous knowledge acquisition will help you trade like a pro.

What is Coinrule?

Coinrule allows you to create trading rules that run automatically across your favourite exchanges.

With Coinrule you can easily develop your own trading rules and strategies and set them up to run automatically. It is the “if-this-then-that” for cryptocurrency trading that allows you to plan your crypto trading rather than having to sit for hours in front of charts. Best of all? No coding skills are required, meaning anyone can use Coinrule.

DISCLAIMER

I am not an analyst or investment advisor. Everything that I provide here site is purely for guidance, informational and educational purposes. All information contained in my post should be independently verified and confirmed. I can’t be found accountable for any loss or damage whatsoever caused in reliance upon such information. Please be aware of the risks involved with trading cryptocurrencies.