12 August 2020
Cryptocurrency trading occurs on exchanges and can be conducted through processes or methods like - Crypto Spot Trading and Crypto Derivatives Exchange. Both the trading differs from each other like two poles apart and are only connected by cryptocurrency.
In this blog, we will understand the concept and differences between Crypto Spot Trading and Crypto Derivatives Exchange:
Cryptocurrency Spot Trading
Cryptocurrency Spot trading can be defined as an investment process that involves purchasing a cryptocurrency and holding the currency until the time its value increases or utilizing the currency to purchase other currencies that you may believe may have an increase in value in the future. Basically it is the buying and selling of the cryptocurrency in trading.
For instance, Ross purchases Bitcoin. Here he has 2 scenarios.
- Holding his Bitcoin and wait for the value to increase.
- Holding the Bitcoin and later utilize it to purchase other Altcoins such as Ethereum or Litecoin that he believes would have an increase in the value.
The strategy with crypto spot trading is pretty simple - the user has to get a crypto wallet, purchase a preferred cryptocurrency asset and sell it when the value in the price increases in order to make a profit.
Cryptocurrency Derivatives Trading
Derivatives trading can be defined as a process that involves a financial contract between two parties that consists of their settled obligations and terms and deriving its value from the cryptocurrency. Basically, it is an agreement to buy or sell cryptocurrency on a predetermined price and time in the future. The value of the cryptocurrency is based upon the anticipated price movements in the future. Through the contract, it enables the user to speculate the price of the asset without having to own it.
Crypto Derivates Trading can be laid out in different methods - Swaps, Futures, Contracts for Difference (CFDs), and Options.
|Cryptocurrency Spot Trading||Cryptocurrency Derivative Trading|
|Traders buy/sell actual cryptocurrencies - an asset||Traders buy/sell cryptocurrency derivatives - a contract|
|With spot trading, the currency is immediately exchanged||With derivatives trading, there is an involvement of future speculations and anticipation|
|The user physically owns the crypto in their crypto wallet||Crypto derivatives are not physical assets or one doesn’t have to physically own it either|
|Leverage is either less or is absent in spot trading||Crypto derivatives trading consists of high leverage|
|Spot trading consists of lower liquidity leading to lower trading volume||Derivatives trading consists of high liquidity leading to higher trading volume|
A report from the 12 derivatives exchanges - Bitmex, Okex, Huobi DM, Binance Futures, Deribit, Bitget, Binance JEX, FTX, Gate.io, BFX.nu, Bitz, and Kumex analyzed and described,
“In 2020 Q1, the total futures trading volume in the industry reached $2.1048 trillion, an increase of 314% from 2019 four quarters’ average.” It also stated, “It is expected that the futures trading volume for the year 2020 will be more than doubled the spot market … Compared with the idea of cash is king in the current market conditions, the cryptocurrency futures industry is still developing rapidly.”
The exchanges that facilitate crypto spot trading - Binance, Bithumb, Coinbase, Kraken, Bitstamp, and many more, while the exchanges that facilitate crypto derivatives exchange - BitMEX, Binance, FTX, Deribit and more.
Cryptocurrency spot trading and derivatives trading serves differently but for the same purpose being earning profits. The trader or the investor has to learn and understand the crypto market and trading so as to choose the method they’d want to take to gain the benefit.