If you are a beginner or haven’t got the separate experience of each, you are more likely to ask this question. Crypto futures and Crypto spot — are the popular cryptocurrency trading instruments with their own set of rules, practices, benefits, and not to miss risks.
When it comes to selection, we must admit that the crypto futures market is a better trading option than the crypto spot. Here are the reasons behind it.
#1. Demands little to no investment
Investing in the crypto futures market has a unique benefit, which may sound surprising to a beginner. You don’t need to have a great bank balance to trade. Without actually owning the digital coin, you can buy and sell it to make a profit. All that is required is some basic sense about asset price trends, and you are good to go.
#2. High returns
Crypto futures is like a long-term SIP investment plan in terms of returns, though many disparities exist between the digital currency and traditional investment that are beyond the scope of this article. Let’s take an example of bitcoin price change over the long and short terms to understand — why the futures market is said to be of high returns.
Had a cryptocurrency trader invested in bitcoin by the end of 2020, he would have gained almost 130% dividends or profits over the investment considering the price change from $26, 363 (29 December 2020) to $60,863.80 (13 April 2021). Even an investment as small as INR1000 would have become INR2300. What if the market has tumbled? It’s fair to ask the question. Well, in this scenario, futures investors have a choice to apply different types of hedging techniques.
Now consider a spot market investment. Below is a spot market price change for a range of cryptocurrencies. Look at the encircled spot or current price of bitcoin. If you buy and sell bitcoin as per best bid and best ask on the spot, you are likely to incur a loss of $6 per bitcoin. Even if you interchange the best bid and best ask prices, the gain would come at $6.
#3. Low risk
Cryptocurrency futures trading is a hedging option itself. Sellers and buyers avoid buying and selling on the spot based on the current price, and move to futures contracts when they are optimistic that the asset value will perform as per their expectations. They enter the contract by having a different view about the market direction, but both have one thing in mind to gain immunity from any volatile market situation and earn profits.
How to respond to any unexpected volatility? You can reduce the level of future risks in the event of an adverse price movement of your crypto assets. Hedging techniques like short-selling provide a sort of insurance cover.
Short-selling involves taking a position to sell an asset believing that the value of the underlying asset will fall. You can buy it later for a lower price — profiting from the difference.
How is the Price of Crypto Futures Determined?
The assessment of price is an assumption but based on descriptive and predictive analysis of the market, upcoming events, acquisitions, etc. The spot price is also a significant factor in deciding the futures price. The cryptocurrency exchange introduces new futures contracts that have expiry dates three months in the future. For instance, bitcoin contracts that will expire in May were launched in March. Usually, 3-month away contracts are launched each month.
Hope you have understood the benefits of choosing crypto futures over the crypto spot. Many exchanges like PCEX Member, have made it easy for you to trade using your preferred instrument. It’s incredibly simple to buy and sell crypto assets in INR. We are among India’s few cryptocurrency trading exchanges to provide you the choice. Subscribe to our latest fintech blogs to stay tuned to the best crypto trading practices, techniques, and trends.