Difference Between Perpetual Futures and Spot Trading
Spot trading is the instantaneous buying and selling of assets, whereas perpetual futures is buying and selling of assets at a predetermined price but with no expiry date.This means traders such as yourself can immediately buy or sell a digital asset like BTC, ETH, etc., at a given price with spot trading, whereas in perpetual futures, you can sell the assets at a fixed price whenever you want.
In many ways, spot trading is the exact opposite of perpetual futures. Here are some of the critical distinctions between the two.
Leverage
In perpetual futures, there’s leverage provided to the traders. Investing with leverages is one of the most capital-effective ways of investment. This is because you’ll be using only a small part of your funds while the remaining funds are from the exchange/broker. You borrow this with some collateral. When the transaction closes, the amount borrowed will be returned.
However, there are no leverages with spot trading, and you will be using only your funds to invest and trade.
What adds to the advantage of perpetual futures is that you can buy/sell whenever you want, which increases the chances of you making a profit.
Scenarios For Making Profits
With spot trading, you will only be making a profit if the price increases since you’ve bought the asset at a price and you’ll be holding it; only if the price increases will you sell the assets and gain profits.
However, with perpetual futures trading, you can profit when there’s an increase or decrease in the price. This is because your prediction can both be of an increase or decrease. If your prediction is correct, you make a profit.
Liquidity
The liquidity in the perpetual futures market is much higher than in spot trading markets. This is beneficial for traders since it involves a lesser risk of losses and a higher chance of profits. On the other hand, spot trading has lesser liquidity and hence will involve more slippage with each transaction.
Prices
The prices in spot trading are the absolute price of the asset, calculated based on the supply and demand in the market. However, with perpetual futures, the price of the assets gets added with a cost of the carry that depends totally upon when the transaction closes. So in a way, the cost is higher, but the chances of profits are higher too.
Conclusion
While spot trading is suitable for beginners, perpetual futures are more apt for seasoned traders. This is because spot trading doesn’t require as much planning as perpetual futures and is more intuitive.
With perpetual futures, one has to build an action plan after doing an in-depth research on market trends, risk to reward ratio, and so on.
Thus if you want to delve into perpetual futures, start with spot trading, understand its nuances and then move on to perpetual futures trading.
*This article only represents the views of observers and does not constitute any investment advice.
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