Differences Between Spot Trading and Trading Long

Spot trading and trading long for stocks can seem like two sides of the same coin, but there are differences between the two.

Blockchain and cryptocurrency revolutionized the finance and trading space. These two paved the way for investors to diversify portfolios with new asset classes. Cryptocurrency trading developed from several spot markets to a complex hybrid system. The new system includes derivatives products such as Crypto Futures. Most investors are unfamiliar with terms such as Futures and Derivatives.

What Is Spot Trading?

Spot trading is similar to spot transactions. Traders receive cryptocurrency or other digital assets they purchase immediately. Sellers can transfer the digital assets to buyers for a financial reward.

Cryptocurrency trading platforms such as Coinbase facilitate crypto-to-crypto transactions to make trading easier. Such platforms allow traders to auction and sell cryptocurrency as they please.

As a trader, the ownership of cryptocurrency transfers to you immediately after the payment goes through. It’s a great way to gain instant profits when the crypto value in the market goes up.

Spot Markets on platforms such as Kraken allow trading in various financial instruments. For instance, the Bitcoin spot market helps investors purchase, own, and sell real Bitcoin.

What Are Derivatives?

A derivative is a financial contract that gains value based on how the underlying asset performs. An underlying asset can be a financial asset, commodity, stock, or currency.

There’s no need to have ownership of the underlying asset, so the assets don’t get delivered after purchase.

Derivative products mainly exist to lower risk and protect investors from price volatility. It’s easier to speculate how future cryptocurrency prices will change.

For instance, you can purchase a BTC/USD contract in the derivatives market. The value of your contract will change depending on the price changes of BTC/USD. If the prices increase, so does your contract’s value and vice versa.

With this in mind, let’s discuss Crypto Futures Trading.

What Is Crypto Futures Trading?

Futures trading is a financial contract that allows traders to make automatic transactions. You can buy or sell an underlying cryptocurrency at a particular future date at a fixed price.

The date and price are pre-set, so when the time comes, the transaction occurs immediately. Platforms such as CurPay use Artificial Intelligence and machine learning to learn and adjust to market changes.

In futures trading, the trader receives no immediate financial benefits. However, other benefits attract more investors than spot trading. For instance, it protects traders from volatility and losses each time the prices move.

When you buy a futures contract, you don’t own the underlying cryptocurrency, so you’ll trade using speculative prices. It’s like a bet on whether the crypto price will rise or fall, so your loss or profit will depend on your accuracy.

You can take a short position when you anticipate the price will fall or a long position if you expect the price to shoot.

Differences between Spot Trading and Trading Long

Long and short positions represent the two possible ways a price can move to gain profits.

In a long position, the trader anticipates the price will rise in the future and therefore buys crypto or goes long. The trader expects a price drop in a short placement, so they sell the crypto or go short.

▪ Leverage

Leverage is essential to investors as it allows them to maximize profits to low investment amounts. Trading long is capital-efficient since leverage enables you to open one BTC future position with a small percentage of the market value of 1 BTC.

The spot market has no leverage, so you’ll have to pay the current market price to buy 1 BTC.

▪ Liquidity

The futures markets offer significant liquidity, often worth trillions per month. For instance, the Bitcoin futures market averages about $2 trillion monthly turnover, higher than the trading volumes in Bitcoin spot markets.

Liquid markets carry lower risk since traders experience less slippage and buyers are always willing to trade.

▪ Future Price vs. Spot Price

In the spot market, all transactions take place at the current prices. Future prices include the spot prices and additional futures premiums.

A positive premium indicates lower spot prices in the future, while negative premiums show higher values.

▪ Fork Ownership

A spot market ensures direct ownership of the crypto you deposit. Your rights, therefore, include major forks while your asset remains on the exchange, similar to stock dividends.

Futures contracts don’t have the same advantage since no such benefits exist.

▪ Long or Short Flexibility

In the Spot Market, you only gain financial benefits if the value of the crypto you hold increases. In a futures market, you can choose between long and short positions.

Futures contracts help to create effective trading strategies such as pairs trading and short-selling. Protecting your investment from crypto volatility and unexpected risks is a great move.

Wrapping Up

Spot trading is easier to handle and understand, which favors most crypto trading beginners. You can set limits and stops when you have open positions to mitigate risk by reducing losses and collecting profits.

However, trading long has more strategic benefits and better opportunities to gain profits.

Futures trading is highly profitable if you understand trading and risk management strategies. Before you trader futures, it’s essential to strategize how you’ll mitigate risks and losses.

With state-of-the-art AI Volatility Protection and everything else you need to customize the perfect trading strategy, CurPay is like having a financial advisor in your corner 24/7. If you are ready to start trading crypto, then be sure to check out CurPay today.