Master the basics of cryptocurrency investing: an explanation of the three methods—spot trading, leverage trading, and futures

The world of cryptocurrency trading may seem complex, but there are actually three basic trading methods that beginners should understand. Before starting to invest in cryptocurrencies, it’s essential to grasp these mechanisms and their differences, as this is the first step toward success. In this article, we will clearly explain everything from spot trading to advanced techniques using leverage.

Cryptocurrency Spot Trading: The Simplest Buying and Selling Method

Cryptocurrency spot trading is as straightforward as shopping in real life. It involves directly buying or selling actual assets like Bitcoin or Ethereum at the current market price. When a buyer and seller complete a transaction, ownership of the asset is transferred immediately.

The main feature of this method is that you do not use any leverage and only trade with the funds you have. If you want to invest 100 USDT, you must have 100 USDT in your account. It’s simple, but this also limits your risk. The only amount you can lose is your invested capital.

Main features of spot trading:

• Instant ownership of Bitcoin, Ethereum, and other assets
• Ability to manage and store assets in your own wallet
• The easiest method for beginners to understand
• No risk of forced liquidation
• If asset value increases over time, it results in profit

Margin Trading: Borrowing to Increase Trading Size

Margin trading takes cryptocurrency investing to the next level. It involves borrowing funds from the platform to trade with a larger amount than your own capital.

For example, if you only have 10 USDT, borrowing 90 USDT from the platform allows you to trade with a total of 100 USDT. This is how “10x leverage” works. The maximum leverage is generally 10 times, enabling you to build larger positions.

However, this method has several conditions. Borrowing incurs interest, and you need to provide collateral in the form of margin assets. If the market moves against your position and the maintenance margin ratio (MMR) reaches 100%, your position will be liquidated automatically. Additionally, fees are charged at settlement.

Key points of margin trading:

• Trading with borrowed funds in the spot market
• Up to 10x leverage
• You gain ownership of the assets but owe repayment of the loan
• Interest and repayment fees apply
• Risk of forced liquidation exists
• Suitable for experienced traders due to higher risk

Futures Trading and Perpetual Contracts: Profiting from Short-Term Price Movements

Futures trading is fundamentally different from the previous two methods. Instead of buying or selling the actual assets, you trade “contracts” that specify a price at which you will buy or sell at a future date. This allows you to profit from price fluctuations without owning the underlying assets.

Futures contracts are mainly divided into two types:

Expiration-based futures contracts have set expiry dates ranging from one day to three months. You must settle your position on the expiry date.

Perpetual contracts have no expiry date. As long as you meet the maintenance margin requirements, you can hold the position indefinitely. They involve periodic funding fees, but traders have more strategic flexibility.

A major advantage of futures trading is the ability to short sell, meaning you can profit from declining prices. You can use strategies like “buy low and sell high,” as well as “sell high and buy back lower.”

However, futures trading allows for large positions with relatively small margin deposits, which can lead to significant profits but also rapid losses. When the maintenance margin reaches 100%, forced liquidation occurs.

Features of futures and perpetual contracts:

• No ownership of actual assets
• Profits from short-term price movements
• Ability to profit from falling markets through short positions
• High leverage (25x–125x depending on the currency pair)
• High risk of forced liquidation
• Used for speculation and hedging
• High potential returns accompanied by high risks

Comparison of the Three Cryptocurrency Trading Methods

Choosing the Best Cryptocurrency Trading Method for You

Investment styles in cryptocurrencies vary from person to person. The choice of trading method depends on your investment goals, risk tolerance, and experience.

Recommended for those who prefer spot trading: Long-term holders, those seeking simple investments, beginners who want to avoid forced liquidation risks.

Recommended for those with some trading experience: Those who want to utilize modest leverage, take moderate risks in the spot market.

Recommended for futures and perpetual contracts: Traders aiming for short-term profits from price movements, those seeking high risk and high return, users interested in complex strategies including short selling, and experienced investors.

Finally, it’s crucial to remember that futures and high-leverage trading only work effectively with proper risk management and position sizing. Decide in advance what percentage of your funds you are willing to lose. This is key to long-term investment success.