Spot vs Margin vs Futures Trading: What Are the Differences?

The cryptocurrency market has experienced exponential growth over the years. With over 4 trillion market cap (capitalization), it is a highly liquid market for short and long-term traders seeking profitability.

 

Due to the increase in global adoption, cryptocurrency has become a mainstream activity, attracting beginners, experts, frequent, and seasoned traders.

 

Among the various trading types in crypto are spot, margin, and futures trading. These two trading methods are the most popular, and while they both allow traders to profit from the volatile market, they differ in many ways. In this article, we’ll take a closer look at how they work, how to differentiate between them, and also help you determine which one is best for you.

What is Spot Trading?

Spot trading in crypto involves buying and selling of cryptocurrency assets for immediate settlement. That is, you own your exchanged asset outrightly once the trade is completed.

How Does Spot Trading Work

Spot trading allows you to perform a trade using your available funds. In other words, you can only trade using your asset without borrowing.  For example, if SOL is trading at $200 and you have $2000 worth of USDT in your wallet, that means you can exchange your USDT for 10 SOL or higher if the price ever reaches your prediction price. While spot trading allows you to buy or sell an asset in the market immediately, the transaction is often divided into four order types:

 

Market Order: In a market order, you can buy or sell an asset at its current trading price in the market. That means if ETH is trading at $4000 and you want to buy $500 worth of ETH, you can only receive 0.125 ETH in exchange. At the same time, selling your 0.125 ETH can only give you $500 due to the asset’s market price.

 

Limit Order: In a limit order, you can sell an asset at a predetermined price. For example, if you predict an asset will rise beyond its current price, you can use a limit order to input your predetermined price, aiming for profits rather than selling at the current price.

 

Trigger Order: A trigger order lets you set a pending buy or sell order that only goes live once the market hits your chosen price, called the trigger price. When that happens, the system automatically places your order at the market rate or your set limit price.

For example, if SOL trades at $200 and you plan to sell when it touches $210, you could set a trigger price of $210 and a limit price of $250 so that once it reaches $210, your sell order is placed automatically.

 

OCO: Order Cancel Order (OCO) is a type of order that lets you set two orders at once, and whenever one is executed, the other is automatically canceled. This can be used for both entering and exiting trades.

 

For example, if SOL is trading at $200, you could set an OCO to buy if the price drops to $190 or if it rises to $210. If the price hits $190 first, your buy order at the dip is executed, and the $210 order is canceled. Later, you could set another OCO to manage your position with a stop-loss at $190 and a take-profit at $220. If the price drops to $190, your stop-loss sells SOL and cancels the take-profit order. If the price reaches $220 first, your take-profit sells SOL and cancels the stop-loss. This allows traders to automate entries and exits, capturing opportunities and protecting their positions without constantly monitoring the market.

Pros of Spot Trading

Trading spot in crypto is beneficial in several ways. Below are some of the advantages of spot trading:

 

Beginner-friendly: Traders own assets immediately in the crypto spot market. This eliminates contractual technicalities for crypto trading newcomers who are still learning the market.

 

Reduces Risk: Spot trading reduces the risk of potential losses. Since it doesn’t utilize leverage, which increases the chances of blowing up your portfolio, you can build your account gradually and ensure sustainability over time.

Cons of Spot Trading

While trading spot is advantageous, it’s not without its downsides. Below are some of the cons of spot trading:

 

Limited Reward Potential: In spot trading, the ROI is proportional to the trading capital. That means your profit on each trade will also depend on your portfolio strength. For instance, if you trade with a $ 1,000 capital, you will earn less on the same percentage move compared to someone trading with more capital.

 

Transaction Fees Can Suck Up Small Profits: If you trade with little capital repeatedly over time, transaction fees can squeeze your profit. For example, scalping, that is, trading within minutes multiple times a day with little spot investment, involves repeated fees. This transaction cost can reduce your portfolio growth eventually if the risk-to-reward ratio is not well structured. 

What is Margin Trading

Margin trading in crypto is the process of borrowing money from an exchange to increase a trading position, with repayment (plus interest) required after the trade closes. 

How Does Margin Trading Work?

Margin trading allows you to trade the cryptocurrency market using your capital as collateral. That means, a $300 position with a 10X position provides you with $30,000. At the end of the trade, if the market moves in your favor, then you’ll automatically repay your loan with interest.

 

However, if the market moves otherwise, you may lose your investment or your portfolio, depending on your trading method. For example, if you want to buy one ETH at $4000, you only need a capital of $400 to use a 10X leverage to get it. That way, you’re borrowing $3600 from the exchange. If ETH rises 10% which is 4,400, you will have $400 in profit. However, if ETH decreases by 10%, which is 3,600, you will lose your initial capital of $400, and that way, your entire trading investment will be wiped out.

Common Modes in Margin Trading

In margin trading, different modes play different roles in your portfolio management. Here are the two common modes in margin trading:

Cross Margin:

Cross margin uses your trading capital along with available portfolio funds to minimize the risk of immediate liquidation.

 

For example, if Ethereum is trading at $1,500 and you have $500 in your portfolio and enter a trade of $150 to long it at 10x leverage, that means you’re borrowing $1,350 from the exchange.

 

If Ethereum’s price declines sharply and your losses reach $350, the system will begin using the remaining balance in your portfolio to keep the position open. If the price keeps falling, the $350 funds left in your account will eventually be wiped out, meaning your entire account balance will be liquidated.

Isolated Margin:

In an isolated margin, traders risk capital by borrowing to increase trading positions. Unlike cross margin, the trade results in automatic liquidation once the price rises or falls beyond the predicted range. Rather than using the available portfolio balance to delay liquidation and eventually stabilize trade, the trade will be automatically wiped out, leaving the remaining balance intact. 

Pros of Margin Trading

Crypto margin trading is advantageous in several ways. Here are some of the benefits of margin trading:

 

Profitability Boost: Margin trading increases profit through leverage and borrowing. It doesn’t limit traders to accessible funds, and that creates room for bigger profits during successful trades.

 

Allows Short Selling to Profit: Margin trading allows traders to profit from falling assets through short selling. You can borrow money to increase your position and sell assets you don’t own during market retracements or downtrends. Once the trade is complete, you return the borrowed collateral to the exchange.

Cons of Margin Trading

While margin trading benefits low-capital traders and professionals, here are some of its disadvantages:

 

High-Risk Trading: In margin trading, mistakes are costly. If the market moves too fast or skips your stop-loss level, you will lose all your money, depending on your trading mode. This liquidation aftermath is also known as a margin call.

 

Requires Debt Repayment: After borrowing from an exchange to trade on margin, you will repay the debts automatically after profits. If the trade eventually ends in a loss, your capital will be used to repay the loan, and if you’re using cross margin, your entire portfolio balance may also be used to cover the loss.

 

Requires Monitoring: Margin trading is risky, depending on the leverage used to increase positions. If the market moves fast against you, it might skip your stop-loss and head toward liquidation. To prevent that, you’ll need to constantly monitor your trades on your phone or laptop to prevent a margin call.

 

What is Futures Trading?

Futures trading is about dealing with contracts, rather than the actual coins. You’re agreeing to buy or sell an asset at a set price in the future, but in crypto, most times you don’t wait for that date. You just trade the price difference between when you entered and when you closed the contract.

How Does Futures Trading Work?

You don’t own the asset itself; you only trade its value. To open a futures position, you’ll need to put down a margin, that is, a small portion of the total contract value. That margin acts as your collateral, more like proof that you can cover potential losses. The margin size depends on the leverage you pick and the kind of futures you’re trading. Meanwhile, since you’re not borrowing, the leverage is usually higher than margin trading. LBank, for example, allows you to use up to 200X leverage. 

Pros of Futures Trading

Trading futures is helpful in many ways. Here are some of the pros of futures trading:

 

Allows Leverage Without Interest: Futures traders allow traders to use leverage to increase positions and potential profit without borrowing money from the exchange.

 

Allows Earning From Different Market Dynamics: Similar to margin trading, traders benefit from different market conditions. Whether the market is going up or down, traders can make a profit by buying long or selling short. 

Cons of Futures Trading

While futures trading allows traders to make a profit without borrowing, there are downsides. Here are some of the cons of futures trading:

 

Higher Liquidation Risk: Futures trading allows up to 125X and sometimes 200X on certain contracts. The higher the leverage, the higher the risk of liquidation during unfavorable market conditions.

Spot VS Margin VS Futures Trading

Frequently Asked Questions

What Are LTs on LBank?

Leveraged tokens remove the stress of liquidation by handling leverage differently. You’re not borrowing money or opening a margin position yourself. Rather, the platform that issues the token manages all that behind the scenes using smart contracts.

 

When the market moves, the token adjusts its exposure automatically. For example, if prices drop, it sells part of the position to keep the leverage steady. If prices rise, it buys more. This constant balancing keeps the leverage under control, so your position doesn’t hit a liquidation point.

What Are Maker Fees and Taker Fees in Trading?

Maker fees are charged when you use a limit order and the order doesn’t fill immediately. Taker fees, on the other hand, are charged on market orders or limit orders that fill immediately. Maker fees mean that you pay for providing liquidity to the market since you will need to wait for someone else to take your order so it can be filled. As for taker fees, you’re paying for taking off existing orders in the market.

How Much Fees Does LBank Charge?

LBank charges 0.10% maker fees and  0.10% taker fees on spot trading. For altcoins, the fees can vary and go up to 0.2%. For futures trading, the charges are 0.02% taker fees and 0.006% maker fees. For Leveraged Token trading, LBank charges 0.20% maker fees and 0.20% taker fees. If a position gets liquidated, LBank will charge 0.06% fees.

Conclusion

Cryptocurrency trading helps traders profit from the market in several ways. Whether it’s spot, margin, or futures trading, every type of trading has its benefits and downsides. While trading is a lucrative means to profit from market ups and downs, the crypto market is highly volatile and requires proper risk management strategies.

 

This article is contributed by an external writer: Olaseni Kehinde Precious.
 
 

Disclaimer: The content created by LBank Creators represents their personal perspectives. LBank does not endorse any content on this page. Readers should do their own research before taking any actions related to the company and carry full responsibility for their decisions, nor can this article be considered as investment advice.