Do you remember your first crypto trade? You probably heard about Bitcoin, registered an account on a crypto exchange and bought a fraction of it. This is what we call a spot buy.
As the crypto market expanded, exchanges started onboarding different financial products, especially derivatives. Today, you can easily trade crypto derivatives on both centralized and decentralized exchanges alike.
So how do they differ?
What is Crypto Derivatives Trading?
The meaning of the word ‘derivative’ is something that is based on another source. Essentially, derivatives derive their value from an underlying asset.
Let’s start from something familiar: stocks. Stock options and futures are examples of derivatives. They are financial contracts that derive their value from an underlying asset, the stock. You may have to go through settlement depending on the derivative you trade.
- Options give you the right, but not the obligation, to buy (we call this a call option) or sell (we call this a put option) the stock at a specific price, within a specific period of time. Thus, you do not need to go through physical settlement (buying or selling the stock asset itself) when the contract expires.
- Futures give you the obligation to buy or sell the stock at a specific price, within a specific period of time. You have to go through physical settlement of the stock once the contract expires.
Crypto options and futures work similarly. They are financial contracts that derive their value from an underlying asset, the crypto. They may also require you to buy or sell the underlying crypto asset.
Crypto Perpetual Futures
Futures contracts were first implemented in commodities trading to hedge. The contract may specify that you can buy X bags of rice at Y price on a certain date. As financial markets matured, they also started offering futures trading.
Translating futures into crypto, however, may not make sense for those who don’t want to trade with physical settlement. This is where crypto perpetuals come in.
Perpetuals have no expiry date and no physical settlements. As long as the trader remains in a healthy margin range, they never have to relinquish their contracts. Perpetuals are an increasingly popular choice with several benefits:
- Allow for speculation and trading with leverage
- You can short a crypto asset that you do not have AND still gain profit in a bear market
- Hedge to minimize risk
An example of a perpetual contract would be any trading pair on ApolloX. You would see that the contracts are USDT-margined contracts e.g. BTCUSDT. This means that the contracts are quoted and settled in USDT.
Another form of perpetual contracts are coin-margined contracts. For example, in a BTCUSD contract, BTC is the base currency and is used to calculate profit and loss.
What is Crypto Spot Trading?
Spot trading happens when you buy or sell the asset at the current market price, with the intention for immediate delivery of the asset. The stock market may be your first memory of spot trading. Major spot markets include NASDAQ and NYSE. A spot trade would be like setting a market order or limit order to buy a Google stock.
Similarly, crypto spot trading may look like setting a market or limit order to buy ETH. Centralized exchanges, the OG platform of crypto trades, heavily feature spot trading though decentralized exchanges are becoming increasingly popular as well.
I’ve just given a short summary on the key differences between crypto derivatives and spot trading. But if you are interested in trading derivatives, definitely read up more or even try out paper trading. DYOR doesn’t just apply to coins!
The views expressed in this article are the author's alone and do not necessarily represent the views of ApolloX.
Risk Reminder: Crypto trading carries a risk. All trading activities are done at your discretion and at your own risk. The information here should not be regarded as financial or investment advice from ApolloX. ApolloX will not be liable for any loss that might arise from your use of any financial product.
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