What Is Crypto Spot Trading?
The term “spot trading” refers to the purchase and sale of digital assets with the aim of immediate delivery. In this type of trade, the transaction happens immediately, meaning that the buyer receives their assets instantly, while the seller receives cash in return. Unlike other types of trading, spot trading does not speculate on the possible rise or fall in the price of a particular currency. This type of asset buying and selling can be done on the crypto exchanges that carry out the transaction itself. Prices are mainly driven by supply and demand and can change wildly, but the percentage of your potential loss will be equal to the percentage of decline in the price of the particular asset, which is different from other types of trading.
What Is Crypto Margin Trading?
Margin trading, also known as leveraged trading, consists of betting on the movements of the market with borrowed funds, while only risking a much smaller amount of money. Margin is the amount of crypto you need to enter into a leveraged position and cover the possible risk of liquidation. In this type of trade, there are two types of positions you can open:
- short position – when you bet that the price of an asset will go down;
- long position – when you predict that the price of a certain currency will increase;
The leverage that allows you to trade higher amounts of money than the ones in your account with borrowed funds, is expressed in ratios and can vary from a 1:1 ratio to a 20:1 or even a 100:1 ratio. It’s important to note that the higher the leverage is, the more risk of loss of funds there is.
What is a Margin Call?
Such a call happens when the broker’s required amount is less than the percentage of the investor’s equity in the account. Securities purchased with a combination of the investor’s own funds and funds borrowed from the investor’s broker are held in the investor’s account. This is a signal that the securities held in the account have lost a percentage of their value. This situation also refers to the demand of the broker or the trading exchange that the investor deposits additional funds in their account.
Crypto Spot Trading: Pros and Cons
Spot trading is widely popular among the majority of investors for the following advantages:
- Easy access – all major cryptocurrency exchanges and online platforms provide this type of service, making it very accessible for every investor;
- Variety of pairs for trading – there is a variety of different currency pairs in which anyone could invest, which offers flexibility and opportunities for diversification of the portfolio;
- Liquidity – it allows investors to sell or buy an asset at the current market price immediately.
However, there are also certain cons that need to be considered, which include:
- Volatility – cryptocurrency trading, regardless of which particular type, is subject to high volatility and risk of potential losses;
- Manipulations – the market is sometimes influenced by manipulations created by bigger investors who want to drive the price in a certain direction;
Crypto Margin Trading: Pros and Cons
The advantages of this type of trading include:
- Leverage – it allows the investors to use more capital than they have, which could lead to higher profits if they manage to open a position in the direction of the market movement;
- Short positions – unlike spot trading, where you can only buy assets with the idea that their price will rise, with margin trading you can bet on a decline in the market prices of certain cryptocurrencies;
- Flexibility – traders can open more types of positions with multiple leverage options;
Possible negative sides include:
- Increased risk – as mentioned above, investing in cryptocurrencies can be risky and subject to volatility. When it comes to this type of trading, this is even more true, as leverage increases the risk even more and can further complicate the management of open positions;
- Possibility of liquidation – a trader’s position may be liquidated if it grows too large in relation to the available capital, which could result in significant losses. When not managed accordingly, certain positions can easily lead to the liquidation of the entire account.
In conclusion, the main differences between the two types are the amount of risk involved as well as the available trading pair options.