Many new crypto adopters find it difficult to distinguish spot trading from contract trading and have no idea which kind of trade they should make under different market environments. Today, let us go through these questions one by one.

Difference Between Spot Trading and Contract Trading

I. Spot trading, the direct exchange between cryptocurrencies

In spot trading, transactions are matched based on the priority of price and time to directly realize the exchange between cryptocurrencies.

Spot trading is just like delivery versus payment. For example, if you buy 1 BTC, then you truly own that 1 BTC. You can store it on a trading platform to conduct more trades or transfer it to your wallet or someone else.

The advantage of spot trading is that you have ownership of the coins after purchase. No matter the price rises or falls, the number of coins in your hand will not change. However, the disadvantage is that you can profit only when the price goes up. If the price falls, your only options are to sell your holding to stop loss or hold onto the coins.

II. Contract trading, financial derivatives in the crypto market

Compared to spot trading, which follows the principle of conventional trades (buy low & sell high), contract trading refers to a model in which buyers and sellers trade based on an agreement that specifies that a certain amount of an asset will be bought/sold at the prescribed price on the agreed date. Contracts can be divided into conventional delivery contracts and futures contracts according to the delivery model. The primary difference between the two is that a delivery contract has a fixed delivery date, while a futures contract does not. In the crypto market, contracts are financial derivatives that are not covered by the spot market. Instead, there are independent derivatives markets where crypto contracts are traded.

In contract trading, users profit through rising/falling crypto prices by buying long or selling short. The price of futures contracts, which do not have an expiration or settlement date, is pegged to the spot market price through a mechanism called the Funding Fee. Before trading contracts, you’ll first need to deposit the margin. On CoinEx, the futures contract market features a maximum leverage ratio of 100x.

Futures contracts can be linear or inverse. To trade linear contracts, you just need to hold USDT; to trade inverse contracts, on the other hand, you’ll need to hold the settlement crypto (e.g. BTC, ETH, etc.). Although futures contract increases the flexibility of trading, it sets more demanding technical requirements for traders. In addition, position management, the choice of the opening price, take profit/stop loss, and the trading mentality are all key parts of contract trading.

III. Differences between the two models

Generally speaking, spot trading features easy, convenient operations, which makes it suitable for crypto beginners. Whether the price rises or falls, the number of coins in your hand will not change. However, you can profit only when the price goes up under favorable market conditions. From a technical perspective, spot trading is more accessible, and your profit is primarily determined by the growth potential of a crypto.
In contract trading, you profit through the rising/falling crypto prices by buying long or selling short based on your predictions about the future price trend. However, you will also bear the corresponding losses if the market trend goes against your predictions. Contract trading comes with more demanding technical requirements. For example, contract traders should be capable of technical analysis and TP/SL.
Though contract trading and margin normally go together, it differs from margin trading, which covers more kinds of cryptos and is suited for users who need to trade multiple cryptos. The advantage of contract trading is that it features higher leverage ratios and does not charge crypto interests. It is thus more suitable for users who prefer trading with a high leverage ratio. In contract trading, you can flexibly adjust the leverage ratio according to the market trend. For example, you can select a higher leverage ratio to maximize your returns when making profits; by the same token, you can also add more margin or lower the leverage ratio to mitigate the liquidation risk when suffering losses.

A Beginner’s Guide: The Difference Between Spot Trading and Contract Trading