Both spot market trading and future leveraged contracts allow traders to trade with more money than they have in their exchange account. For example, if a trader buys 1 Bitcoin worth $10,000 by using 0.2 BTC and choosing 5X leverage, they can potentially make a profit of around $500 if the price of Bitcoin goes up to $10,100. However, if the price of Bitcoin crashes to $8,000, the trader would lose their initial 0.2 BTC investment. In this article, we will learn about the difference between spot and future markets.
Real vs Synthetic:
Spot markets involve actual trading assets, while futures are derivatives or synthetic commitments between two parties. In a futures contract, the underlying asset may need to be bought or sold at the end of the contract, while some contracts are settled in cash based on the asset's price at the contract's due date. Perpetual swaps, popular in cryptocurrency exchanges, are similar to futures contracts but do not expire, simulating a spot-holding.
Spot lending fees:
In a spot market, using leverage requires borrowing real coins and paying a fee, usually a daily interest rate fixed for up to 20 days. These fees can affect the outcome of the trade. In contrast, in futures and perpetual markets, the funds used for leverage are credited to the trader's account and do not carry an interest rate. However, the future price may be slightly higher than the spot price due to the implied interest rate in the market.
Spot markets have a limited supply of coins in their lending pools, offering lower leverage levels. Futures and perpetual markets are not limited by a pool of lenders, which allows exchanges to provide higher leverage levels of 100X or more to many users.
In a spot market, the trader has direct ownership of the coins they deposited and the right to any forks or dividends that occur while the assets are in exchange. Ownership of a futures contract does not provide any benefits of this type.
Spot cryptocurrency exchanges typically charge basic users a fee of between 0.1% to 0.2% of the position for each trade. Futures trading fees generally are 50% to 80% cheaper. However, futures traders usually use higher leverage that creates bigger positions so that they may pay similar fees overall.