(learn the relevant information of the spot trading vs margin trading before diving into the actual trading )
The processes that involve the buying and selling of digital assets are known as trading. You might also doubt spot trading vs margin trading if you are a new trader. But these are the trading options that users have to choose before starting their trading journey. So here’s what you should know about spot trading vs margin trading.
What is Spot Trading?
Spot trading means trading positioned in the spot market with the current prices of an asset at a spot. This type of trade occurs immediately in the spot market at a current price. The name spot signifies that trades are executed immediately at the current prices.
The spot market is nearly visible in all financial markets, such as stocks, forex, commodities, and bonds. If you want to start spot trading, there are three concepts that you need to understand: spot price, trade date, and settlement date.
Key Takeaways
- Spot trading is considered one of the most common types of trading in the crypto industry.
- The goal of spot trading is to make short-term profits.
- Margin trading relies on the loans that trades borrow from the brokerage firm.
Spot price
Spot prices refer to the current price of an asset at which trades are placed. They serve as a primary indicator of future trades. Based on the spot price, traders can make predictions about the future.
The Spot market relies on the buying, selling, and order book system. Therefore, spot prices are determined by the selling and buying orders that traders post.
Trade date
Trade date refers to the time at which trades are placed. Essentially it records data of an asset when the transaction is initiated.
Settlement date
A Settlement date also referred to as the final date, is when trades are decided to be placed. It means the last time when the trades are executed. Settlement dates are usually different for different kinds of markets. It can be the same day or two days after the actual trade is executed.
The trade will get executed at the available bidding price, as it is spot trading, so users must have available assets when paying for the trade.
For Example, if you buy Ethereum for $500, your account should have a balance of $500 by the date of settlement. If you don’t have that balance, the exchange will not allow you to take a position for Ethereum.
What is Margin Trading?
Margin Trading is a type of trading where users borrow funds from a third party to leverage their position. However, unlike Spot Trading, you don’t need to pay the whole amount to make orders. The critical components of margin trading are leverage, margin, collateral, and liquidation.
To get the position, you should have collateral of assets at the margin of the position you want to enter. For example, if you are looking to buy $1000 Ethereum and the exchange is giving you the leverage of 100x on crypto investments, your account should have only $10.
You need to pay 1% of the transaction amount, and you can also withdraw profits to enter the new positions.
Leverage
Leverage means borrowed funds to pay for a trade. E.g., if you want to buy $800 with ethereum at a leverage factor of 4x, you only have to pay $200, and the rest of the amount will be spent by the exchange or trading platform.
Margin
We all know market prices fluctuate in real-time; you never know what will happen next. So traders receive margin calls when the equity level goes below the margin level. So, they must sell some of their position to bring the equity to the margin trading level.
Collateral and Liquidation
Collateral is a valuable asset that is kept for a secured loan. It reduces the risk for a lender. E.g., if the borrower could not pay for the debt, a lender could sell off the collateral and recover the funds. Typically loans are secured by the collaterals.
Crypto Spot Trading:
Pros
- Users can take immediate delivery if it is required.
- Spot Trading ensures active and liquid markets.
- It gives real-time analysis of the live market.
Cons
- It is not the best option for hedging.
- It gives physical delivery in many instances.
Crypto Margin Trading:
Pros
- It gives an opportunity to make better profit due to leverage.
- It gives more flexibility than other loan types.
- It also enhances purchasing power.
Cons
- The chances of losses are higher due to leverage.
- It may create the possibilities of forced liquidations, which leads to sale of securities.
Why go with Spot Trading, or why not?
Spot Trading controls the total risk because users are allowed to trade only with the amount they have in their account. Users cannot lose more because Spot trading only allows trading the amount you have in your account as it allows trading for only the assets you own, not more than that.
Besides, Spot Trading has some downsides because you need more authority to manage your account balance. Users are not allowed to take full advantage of the best trading opportunities. Furthermore, you can only take the amount you have in your account, which is why your profit will have some limitations.
Why go with Margin Trading, and why not?
The most significant advantage of Margin Trading is that it allows for amplifying profits. The leverage element of 100x gives users an edge in earning a considerable profit while investing a small amount. With Margin trading, a good trade can provide a chance to get high returns.
It depends on your trading style; sometimes, Margin trading can give you a massive profit at low risk. Low-frequency trading enters into limited positions, which they are sure of. Margin Trading takes a perfect benefit of this trade type and can give higher profitability.
There is always a massive risk to going with Margin Trading because you can trade up to 100x of the capital and lose more than your initial investment. So, the amount can get bigger and be considered a significant risk.
In Margin Trading, your position may get liquidated if you need more margin in your account. Therefore, another critical factor is to check the interest in your position, which is not a particular amount depending on the platform you choose and the direction of the position.
Which is the right strategy?
Now the biggest question arises which strategy should you implement? No one can understand you better than yourself, so you must build your plan. Do some research and analyze the market deeply; it will give you a better understanding to pick an ideal strategy for you.
FAQs
Q. Is the spot better than the future?
Ans. The main difference between the spot and the future is the buying method. For Example, spots are immediately available for buying while futures trading is done in the future.
Q. Is spot trading less risky?
Ans. Yes, spot trading is comparatively less risky than margin trading because you don’t have to wait for margin calls.
Q. Can spot trading be profitable?
Ans. Yes, spot trading can be a great option for beginners because it doesn’t involve much risk. It can also be a great option to make quick profits without risking your funds.
Q. Does spot trading expire?
Ans. No, spot trading has no expiry time. However, they are designed for the short time trading goals.
Q. Can spot trading be liquidated?
Ans. Yes, liquidity is available for both spot and future trades.
Conclusion
When you decide to trade in the crypto market, it is vital to ensure why you want to trade. To be a successful trader, you must decide which trading strategy benefits you. For Example, spot trading and margin trading, both have their advantages and disadvantages.
Spot trading is suitable if you are looking for a short-time option. However, margin trading is a better option if your goal is a long-term benefit. Moreover, the value of assets can increase and decrease at any time. Trading should be your personal choice, So we suggest investing at your own risk.
