CoinEx Introduction: A Comparison among Spot Trading, Margin Trading & Contract Trading
Newcomers to the crypto field may find it hard to distinguish between spot trading, margin trading and contract trading. Since a contract inherently carries a leverage, many may confuse contract trading with margin trading. But they are totally different from each other.
So what are the subtle differences between spot trading, margin trading and contract trading? How can we choose the most suitable trading model according to the actual market conditions? Below are more details.
1. Spot trading directly realizes the exchange between cryptos
In spot trading, transactions will be matched based on the priority of price and time to directly realize the exchange between cryptocurrencies.
Spot trading is the same as everyday purchases, that is, payment upon delivery. Suppose a rich man purchases a BTC for 50,000 USDT, and then he literally owns that BTC. He can put it on a trading platform for trading, transfer it to his wallet, or even generously give it to others.
Spot trading is advantageous in the fact that you own the coins you buy, and the number of coins will remain the same regardless of the ups and downs in the price. But the disadvantage is that you can only make a profit when the crypto price rises. If the price falls, you have to sell the coins to stop loss or keep holding them and wait for a rebound.
2. Margin trading ensures amplified profits with small funds
Margin trading allows magnifying the principal by multiple times. You can rake in huge profits with a small amount of funds through margin trading. Throw a sprat to catch a herring! However, it will also saddle you with amplified losses when the market moves against you.
In margin trading, you can magnify gains by adding leverage yet at the risk of higher losses. The more you gain, the more losses you may risk. Moreover, you can use leverage to borrow coins, and bear the interest on coins borrowed regardless of profit or loss.
For example, the BTC/USDT market on CoinEx supports a maximum of 10x leverage, which means, your gains may be increased tenfold if your prediction on the market trend is correct. Compared with spot trading, margin trading allows not only buying coins before selling them but also selling coins before buying them (that is, to sell the coins borrowed and then buy some for repayment when the price falls). As a result, margin trading can be profitable even under a sluggish market condition.
Leverage, as a double-edged sword, magnifies both returns and risks. For example, if you buy BTC long with 10x leverage and the BTC price keeps falling afterwards, the losses you need to bear will increase tenfold. If the mark price is lower than the liquidation price, all the margin of the current position is deducted, or in other words, the margin reaches 0.
3. Contract trading, a derivative without an expiry date
First, margin trading is a derivative of spot trading in the spot trading market, while contract trading requires an independent derivatives trading market. Second, margin trading and contract trading support different levels of leverage. At present, the leverage provided by most trading platforms ranges from 1x to 10x. CoinEx spot trading, for example, supports 10x leverage at most, while its perpetual contract market enables a maximum of 100x leverage.
Contracts allow you to buy long or sell short based on your predictions about the future upside and downside of the prices. The perpetual contract does not have an expiry or settlement date. The Spot Market Price is anchored in the mechanics of a funding component in a Perpetual Contract. You need to transfer the margin before trading.
Perpetual contracts include the USDT-margined contract (or the linear contract) and the coin-margined contract (or the inverse contract). The former only requires the stablecoin USDT for trading, while the latter uses the settlement currencies, such as BTC and ETH.
Although contracts make trading more flexible, they pose a higher technical threshold for investors. What’s more, abilities of position management, point selection, stopping profit and loss, and mentality control are all important in contract trading.
In a word, spot trading is more newbie-friendly since it involves the simplest, the most convenient operation. The number of coins will remain the same regardless of the ups and downs in the price. But you can gain profits only when the crypto price rises under good market conditions. Spot trading does not require too much skill, and it is the potential for future appreciation that really matters for a certain cryptocurrency.
Margin trading allows you to make big investments with small funds. You can maximize the profits by buying long or selling short in margin trading. It can also be profitable even in a sluggish market or a price drop. But you need to bear high risks of amplified losses or even forced liquidation.
Contract trading does not have an expiry or settlement date. You can buy long or sell short based on your predictions about the future upside and downside of the prices. It requires higher technical skills, that is, you need to be capable of technical analysis and stopping profit and loss.
Margin trading and contract trading are totally different from each other. Margin trading supports more cryptocurrencies and is thus suitable for users with demand for trading multiple cryptos; contract trading supports higher leverages, and does not charge any interest on lending, which is favored by those with a higher risk appetite.