Spot Trading vs Futures Trading in Crypto

Considering the high volatility levels in cryptocurrencies, traders are constantly seeking ways to optimize their profits — and crypto futures offer just that opportunity! Discover the differences between futures and spot, and maximize your gains with Bitsgap!

Although newcomers to crypto are often encouraged to dip their toes into spot trading as a simpler and more direct approach, the rapidly expanding world of cryptocurrency derivatives is definitely worth exploring!

Over recent years, this market has experienced incredible growth, and one of the most sought-after derivatives is none other than futures!

To truly excel as a crypto trader, it's essential to grasp the differences between spot and futures markets.

In this article, we'll explore the distinct aspects of both spot and futures trading and unveil a range of powerful trading tools on Bitsgap that'll help you elevate your futures trading game to new heights!

What Is Crypto Futures Trading?

In the futures market, you trade contracts representing the value of a specific cryptocurrency. In other words, you get all the thrill and opportunity of crypto price movements without actually owning the underlying asset.

When you buy a futures contract, you're not bogged down with the responsibilities of asset ownership like voting or staking. You're free to focus on the speculation and profit potential.

Crypto futures offer a way to tap into the volatility of the market and leverage price changes, whether the movement is up or down. You get to make predictions on where the price of a crypto is heading, and if you're right, the profits can be huge (if you’re wrong, however, your profits can go poof, yet that’s a tale for the “Leverage” section).

👉 With futures, you can ride the waves of a crypto's price fluctuations without buying the actual crypto. If you think the price is going to surge, you buy a futures contract to go long. If you expect a drop, sell to go short. Either way, you have the opportunity for big gains if your prediction is right.

Exchanges like Binance Futures facilitate crypto futures trading 24/7. They have risk management features in place, like insurance funds, to protect traders. While spot exchanges are simple, derivative exchanges open the door to more advanced strategies and greater potential profit.

What Are Futures Contracts in Cryptocurrency?

As mentioned, cryptocurrency futures are contracts between two investors who make educated guesses on a cryptocurrency's future price without owning the underlying asset.

You can trade cryptocurrency futures on the renowned Chicago Mercantile Exchange (CME) and a variety of cryptocurrency exchanges. Bitcoin and Ethereum futures on CME have a set expiration on the last Friday of the month at 4:00 pm London time. But, on crypto exchanges like Binance, OKX, Kraken, and more, crypto futures are perpetual — they never expire.

👉 For example, imagine that Bob purchases a February gold futures contract at $1,500 per ounce. He must fulfill this contract at expiration, regardless of the prevailing price. On the other hand, if Bob chooses a perpetual contract, he agrees to buy gold at a later time for $1,500 per ounce. This agreement isn't constrained by time, allowing Bob to exit the position and recover his margin whenever he wants.

Unlike equity futures, which wrap up by delivering the asset at contract maturity, perpetual futures always settle in cash.

To maintain a close relationship with the spot price of the underlying asset, perpetual futures employ a mechanism called the funding rate. This rate is periodically swapped between long and short position holders, encouraging positions that align the contract price with the spot price. This unique feature sets them apart from traditional futures contracts with predetermined settlement or expiration dates.

As long as you've got enough maintenance margin, you can keep your long or short positions open indefinitely. The maintenance margin is the smallest amount of collateral you need to hold on to your open trading positions.

What's more, since there's no asset delivery involved, perpetual futures open up the possibility of trading with high levels of leverage.

Now, here's where it gets interesting.

What Is Leverage in Crypto Futures Trading?

Leverage is a trading tool that helps you amplify your market exposure by using borrowed funds from a broker to execute trades. In other words, you can trade with more funds than you have in your wallet. Depending on the crypto exchange, you could borrow up to 125 times your account balance.

Leverage is represented as a ratio, like 5x, 10x, or 20x, indicating the multiplier applied to your initial capital.

👉 For example, if you have $100 in your exchange account and want to open a position in bitcoin worth $1,000, a 10x leverage will grant your $100 the same purchasing power as $1,000.

This means you can borrow and sell an asset, even if you don't own it, based on your market predictions.

How Leverage Works + Benefits & Risks

Exchanges require you to provide some form of insurance, called an "initial margin," in case the trade goes against you. You must set aside this margin before engaging in a leveraged trade.

The required collateral depends on the leverage used and the total value of the position you want to open. This protects you from liquidation. Leverage limits, in turn, depend on your exchange and the assets traded.

While leverage can increase potential profits for crypto traders, it also amplifies potential losses. So, before using leverage, you should weigh all its pros and cons.

Skillful traders who accurately predict price movements can score huge wins with leverage. You have the chance to magnify your gains and earn way more money than with regular spot trading. Futures free up your capital so you can put more into other investments. If you have confidence in your positions, leverage allows you to open bigger ones with less upfront cost.

Of course, the crypto market is notoriously volatile, so leverage also brings bigger risks, especially for new traders. Exchanges may force-close your position if it drops too much, triggering a "liquidation" that locks in your losses regardless of what happens after. Some exchanges charge "funding fees" for keeping positions open, and these can seriously hurt your profits if not managed properly.

Leverage is a double-edged sword — while it amplifies your gains, it also amplifies your losses. The key is using the right amount of leverage for your experience level and risk tolerance. Start small as you learn the ropes, and never risk more than you can afford to lose.

What Is Liquidation in Crypto?

Cryptocurrency liquidation takes place when your position is forcibly closed due to an inadequate margin covering an ongoing loss. This occurs when you cannot meet the margin requirement for their leveraged position, resulting in the automatic liquidation of your position since you lack sufficient funds to keep your trades open.

It works like this:

Say you have $100 in your trading account and use 20x leverage to open a $2,000 BTC position. Your profits and losses are now 20 times bigger! If BTC goes up 5%, your position gains $100 — meaning that with just a 5% move, you've made your entire initial margin. Impressive, right?

But beware, because losses are also multiplied. A 2% drop costs you $40, and a 5% drop liquidates your position completely. Without leverage, you would have only experienced a 5% loss. But with 20x leverage, there's little room for error.

The potential rewards of leverage are huge, but so are the risks. The key is using leverage responsibly and having a solid risk management strategy in place.

Crypto Spot Trading vs Futures Trading

In the spot market, you buy and sell crypto for immediate delivery, so you gain direct ownership of cryptocurrencies and become eligible for economic benefits like voting on major forks or participating in staking. But in the futures market, you trade contracts representing the value of a cryptocurrency. You don't own the underlying asset — just an agreement to buy or sell it later.

Below are a few key differences between crypto spot trading and crypto futures trading:

• Leverage: Futures let you control a big position for a fraction of the cost. If you only have $10,000, you could only buy $10,000 of Bitcoin spot. But in futures, $10,000 could control a $100,000 BTC position! You amplify both profits and losses, but with proper risk management, leverage can mean huge gains.
• Going Long or Short: In spot, you can only profit from price rises. But futures let you short crypto too — you can make money whether prices go up or down. Futures are ideal for hedging risk or speculating on volatility.
• Liquidity: Crypto futures see trillions in volume each month, far more than spot. This means fast, efficient trading and better price discovery. You can enter and exit positions quickly without major slippage.
• Spot vs. Futures Prices: The spot price is the current market price for buying or selling crypto instantly. The futures price depends on the spot price plus any "premium" — the extra amount buyers will pay for the opportunity to buy or sell at a later date. The premium changes based on supply, demand, and market sentiment.

While spot trading is simple, futures bring more advanced options like leverage, going short, and tapping into huge liquidity. The potential rewards are massive, but so are the risks — so start slowly and learn the ropes first.

Margin Trading vs Futures Trading in Crypto

Margin trading is a method to enhance returns in spot trading. Spot trading involves paying the full amount for a crypto asset upfront and then taking possession of the asset. In contrast, margin trading enables you to borrow funds from a broker to make speculative trades, profit from market volatility, and eventually repay the borrowed funds.

Futures trading involves attaching an asset to a derivative contract, agreeing to buy or sell a specific asset at a future date and price. Initially designed as a hedge for commodity traders, futures have evolved into a speculative tool that allows traders to buy a larger quantity of an asset by paying a smaller amount.

While both margin and futures trading employ leverage, allowing you to open positions in the market and potentially make returns that exceed those in the spot market, there are differences to keep in mind:

• Margin trading happens in the spot market — you buy and sell actual digital assets. Futures are traded in the derivatives market, where you speculate on future asset prices by trading futures contracts.
• Margin trading leverage typically ranges from 5-20x, allowing you to amplify your buying power modestly. Futures leverage can exceed 100x, for massive amplification of both gains and losses.
• Margin trading lets you borrow money from brokers to trade crypto spot. You pay interest on the loan, and spot positions are flexible. Futures require an initial deposit to control a contract, with no interest or loan.
• Margin trading suits short-term speculators making spot plays. Futures attract long-term investors hedging risk or seeking big wins.

While margin and futures both offer leverage, they differ in markets, mechanics, and risks.

Margin trading is flexible but risky, requiring savvy management of interest and volatility. Futures move fast and losses can snowball, demanding education and discipline.

You’re welcome to learn more about margin trading here: 10x Your Crypto.

Benefits of Crypto Futures

Crypto futures trading offers some exciting opportunities. Here are the major pros:

• Ease and convenience: Crypto futures trading offers simplicity, making it easier to invest in crypto assets, speculate on their price movements, and profit without needing to own and securely store the crypto asset.
• Leverage: Leverage allows you to control a large contract value based on an underlying asset with a relatively small amount of capital.
• Higher profit potential: With the power of leverage, futures open the door to potentially massive wins. If you predict the market right, the payoff can be huge.
• Safety: Crypto futures markets can be considered safer for trading purposes, as they have position and price limits in place that help you reduce your risk exposure.
• Flexibility: You can go long or short with futures, using strategies like scalping that suit volatile markets. Futures give you more flexibility to capitalize on any price movement.
• Price accuracy: Perpetual futures stay very close to spot prices, with funding rates keeping them aligned. You get an accurate sense of current market sentiment.
• Hedging tool: Long-term investors can use futures to offset risk in their spot holdings. Go short futures against your long spot positions to protect from potential drops.

Risks of Cryptocurrency Futures Trading

Of course, the thrills of futures also bring risks:

• Leverage cuts both ways: While leverage means bigger gains, it also means bigger losses — and inexperienced traders can get liquidated quickly if the market moves against them.
• No asset ownership: Although you profit from price changes, you don't own the underlying crypto. You miss out on benefits like staking rewards or voting rights.

Bitsgap’s Futures Trading Instruments

If you want to plunge into futures trading, then look no further than Bitsgap. With Bitsgap, one of the largest crypto aggregators, you can trade futures both manually and using automated crypto trading bots.

Among the crypto bots on offer, you can choose COMBO and DCA Futures. Let’s look at them in more detail below:

Bitsgap’s COMBO Bot = GRID+DCA

Bitsgap's trend-following COMBO trading bot (Pic. 1) brings together the best of GRID and DCA algorithms to work its magic in futures trading. To put it simply, COMBO harnesses GRID trading to catch every little price swing, while DCA helps optimize your entry for the biggest bang for your buck. COMBO bot can follow trends up or down, so no matter which way the market moves, the opportunities to rack up returns are huge!

Once COMBO bot is unleashed, it uses 50% of your funds to open a position with leverage — either long or short depending on market conditions. The other 50% is used for DCA and GRID orders to keep amplifying your position. COMBO bot automatically sets take profit orders to lock in gains as your position builds, and it trails a stop loss to protect your profits.

As COMBO bot executes DCA orders, it increases your position size while adjusting your entry price for the best average — the more it buys or sells, the lower your average entry gets! If it closes out a position at a profit, it starts a new cycle of DCA and GRID trading to keep the thrills coming.

Take profit and stop loss orders always execute at the price levels you set. For short positions, take profit is at the bottom and stop loss at the top. For long positions, flip it — take profit at the top, stop loss at the bottom.

If you're ready to supercharge your trading, COMBO bot can unlock the full potential of crypto futures. But you have to learn to walk before you run! Start small, watch how COMBO bot handles the swings, and see your profits and positions build over time as you get more comfortable.

Want to learn more about COMBO? Read here and here. Ready to roll? Click the link below.

DCA Futures Bot

The DCA Futures bot (Pic. 2) is your trusty companion for maintaining a stable position amidst the rollercoaster of futures market fluctuations! By spreading your investment across consistent buy or sell trades, you'll achieve a more favorable average entry price while minimizing the impact of market volatility.

But unlike it’s spot market counterpart, DCA Futures is specially designed for rapid, impressive returns in the high-octane futures market, plus:

• Up to 10x leverage
• Long and Short strategies
• Demo or Binance Futures
• Familiar settings & multiple customization options

Contrary to its COMBO bot relative, the DCA Futures bot operates in cycles. It opens a position and averages or closes it using a single order, bypassing the resetting-averaging-orders antics of the COMBO bot.

In a bullish market, unleash the Long DCA Futures bot to automatically lock in gains as prices soar. Don’t worry; if a sudden reversal occurs, it'll seize the opportunity to buy the dip before the next rally.

In a bearish market, opt for the Short DCA Futures bot, which will generate profits as prices tumble. And if a bounce happens, it swiftly rebalances to a lower average, ready to capitalize once the decline resumes.

Want to learn more about DCA Futures? Read here. Otherwise — watch this awesome primer:

Ready to roll? Click the link below.

Conclusion

Crypto futures trading opens up a whole new world of opportunities! While regular spot trading is straightforward buying and selling, futures allow you to speculate on the future and amplify your gains through leverage. How cool is that?

By understanding how futures differ from spot trading, you can supercharge your trading strategy. Use spot trading to buy and hold, and use futures to make calculated bets on where the market is heading. Together, they give you more options to profit and manage risks.

The best part is, you don't have to figure this all out alone! Bitsgap's COMBO and DCA Futures bots are your personal guides to navigating the futures market. These clever bots can help you make smart decisions and maximize your wins in futures trading. How awesome to have experienced bots backing you up!

What are you waiting for? Try them now!

FAQs

Where Can You Trade Cryptocurrency Futures?

You can trade futures on a variety of cryptocurrency trading platforms, such as Binance, OKX, or Bybit. You can also connect your Binance Futures account to Bitsgap and combine the best of both worlds — Binance’s liquid markets and cutting-edge trading tools from Bitsgap.

Are Crypto Futures Legal in the U.S.?

Cryptocurrency futures are legal in the U.S. and can be traded on approved cryptocurrency exchanges or the CME via designated brokers. To trade cryptocurrency futures options, you can choose from brokers like Interactive Brokers, Edge Clear, Ironbeam, or Tradestation.