Spot and futures markets have become popular among crypto investors. However, which one is the best system for you? In this article, Gate.io will provide a deeper explanation of spot vs futures trading.
Gate.io is a well-known cryptocurrency exchange that offers both spot and futures trading. While spot trading is straightforward and involves buying and selling cryptocurrencies at the current market price, futures trading is a little more complex.
Gate.io offers spot and futures trading for traders to exploit the cryptocurrency market. While spot trading is the most popular and straightforward form, futures trading offers a higher level of risk and greater potential rewards. Traders need to have a solid understanding of the key concepts and terms involved in both forms of trading, including mark price, initial and maintenance margin, leverage, funding rate, and risk. With this guide, traders can make informed decisions when trading on Gate.io and take advantage of the opportunities presented by the cryptocurrency market.
Spot trading is the most straightforward and popular form of trading on Gate.io. It involves buying or selling cryptocurrencies at the current market price, which is the price that a specific cryptocurrency is being traded at in the exchange at the time of the transaction. Spot trading allows you to take advantage of the immediate price fluctuations in the cryptocurrency market and can be an excellent way to capitalize on short-term price movements.
When you place an order for spot trading, you buy or sell cryptocurrencies immediately. This means that the transaction will be settled within a few minutes, and you will own the cryptocurrency you purchased or receive the funds for the cryptocurrency you sold.
When it comes to spot trading on Gate.io, there are several important concepts and terms that traders should be familiar with.
In spot trading, the mark price calculates the unrealized profit and loss. The mark price is designed to prevent market manipulation and ensure that the cryptocurrency's price is equivalent to the spot price. The mark price is determined by various factors, including trading volume, market liquidity, and the prices of other exchanges.
Initial and Maintenance Margin
Traders who engage in spot trading should also be familiar with the concept of Initial and Maintenance Margin. The initial margin is the cryptocurrency or fiat currency a trader must deposit to open a position. On the other hand, the maintenance margin is the minimum amount of collateral that must be maintained to keep the position open. The position will be liquidated if the margin falls below the maintenance margin level.
Leverage is the ability to control a larger position with a smaller amount of capital. In spot trading, traders can trade with leverage, amplifying potential profits and increasing risk. Gate.io offers leverage up to 10x, meaning traders can open a position up to 10 times larger than their initial margin.
The funding rate is a payment made between all longs and shorts in the perpetual futures market and applies to some types of spot trading. The funding rate decides which party will be the payer and which will be the payee in the transaction. Long positions pay short positions if the rate is positive, but if the rate is negative, short positions pay long positions.
While spot trading allows traders to take advantage of short-term price movements, it also involves risk. Unlike futures trading, which has a fixed expiration date and settlement, spot trading has no predetermined exit point. This means traders must actively manage their positions and be prepared to take losses if the market moves against them. Additionally, leverage can increase potential profits and the risk of losses.
Advantages of Spot Trading
- Immediate transactions
- No expiration date
- Lower fees
- No requirement for specialized knowledge
Disadvantages of Spot Trading
- High volatility
- Risk of market manipulation
- Limited profit potential
- Limited risk management tools
On the other hand, it involves buying or selling cryptocurrencies at a specified price and date in the future. The cryptocurrency's price is determined by the market conditions at the contract's expiration. Futures trading allows you to take advantage of market fluctuations by locking in a price for the future, but it also involves a higher level of risk.
Gate.io offers traditional futures trading as well as perpetual futures trading. Traditional futures are similar to futures trading in other financial markets, while perpetual futures are unique to cryptocurrency. Perpetual futures do not have an expiration date and do not require settlement. Instead, traders need to focus on the rises and falls of the price.
To prevent market manipulation and ensure that the price of perpetual futures contracts is equivalent to the spot price, Gate.io uses the mark price as the basis for calculating unrealized profit and loss. The mark price is the average of the prices on multiple exchanges, updated every second. By using the mark price, traders can be confident that they are trading at fair market value.
Initial and Maintenance
Margin In futures trading, you need to have a solid understanding of the levels of the initial and maintenance margins, with a particular focus on the maintenance margin. Your trade will be liquidated if your available margin falls below the required maintenance margin. It is highly recommended that you close any holdings above the maintenance margin to avoid incurring increased charges due to liquidation.
One of the advantages of futures trading is the leverage that is offered. Gate.io offers higher leverage than traditional futures trading. Leverage allows you to make larger trades with less collateral. However, it also increases your risk, as you could lose more than your initial investment.
The funding rate is the payment made between all longs and shorts in the perpetual futures market. It decides which party will be the payer and which will be the payee in the transaction. Long positions pay short positions if the rate is positive, but if the rate is negative, short positions pay long positions. Gate.io uses the funding rate to balance pricing and ensure long-term convergence between the price of perpetual futures and the mark price.
Futures trading presents a potential financial loss. Unlike spot markets, futures markets permit you to make big orders not fully backed by their initial collateral. This practice is referred to as margin trading. The amount of margin that is accessible has expanded as a direct result of the technical progress made in the markets. Gate.io has a variety of guidelines and safeguards in place to prevent you from declaring bankruptcy and protect the exchange's interests. These will be discussed in greater detail on the website.
Advantages of Futures Trading
- Amplified profit potential with leverage
- Predetermined exit point
- It can be used for hedging
- Access to a wider range of assets
Disadvantages of Futures Trading
- Higher level of risk due to leverage
- Possibility of margin calls
- Complex pricing mechanisms
- Limited flexibility due to fixed terms
Besides providing spot and futures trading, Gate.io allows clients to earn up to $10 in commissions by becoming influencers. How does it work? Read more in the article How to be Gate.io Influencers and Earn $10 Per User.