The cryptocurrency market operates on a 24/7 basis, which means you can buy and sell cryptocurrencies anywhere, anytime. So it is crucial to understand trading in the cryptocurrency market. We will introduce cryptocurrencies' two main financial instruments: "Spot" and "Derivatives" to pave the way for you to start trading.
- What is Spot Trading?
- How to Spot Trade (BingX Platform Guide) - YouTube
- What is Derivatives Trading?
- What is Futures?
- What is Perpetual Futures?
- What is Option?
- How to trade contracts on BingX？
What is Spot Trading?
A spot trade is the purchase or sale of a cryptocurrency for immediate delivery. Delivery means that the buyer and seller fulfill their commitment to the transaction. Spot Trading is characterized by the immediate delivery of cryptocurrencies by the buyer and seller in a successful transaction, satisfying the needs of both sides for trading now.
Suppose the spot price of Bitcoin is $40,000 right now, and a buyer is buying one BTC in the spot market, which costs $40,000.
- Suppose after one month, the price of Bitcoin rises to $60,000.
If the buyer sells the BTC, according to [PnL Amount = (Selling Price - Buying Price) * Trade Volume], ($60,000 - $40,000) * 1 = $20,000, the buyer makes a profit of $20,000.
- Suppose after one month, the price of Bitcoin falls to $20,000.
If the buyer sells the position, according to [PnL Amount = (Selling Price - Buying Price) * Trade Volume], ($20,000 - $40,000) * 1 = -$20,000, the buyer loses $20,000.
What is Derivatives Trading?
Derivative is a financial contract between two or more parties with a value derived from a single or a group of crypto assets. Derivatives include futures contracts, options, warrants, forwards contracts, swaps, etc. There are different trading methods and uses for different derivative financial instruments.
Currently, the mainstream derivatives in the cryptocurrency market are futures contract, perpetual futures, and option contract.
What is Futures?
Futures, an early derivative product launched in the cryptocurrency market, is the most traded derivative today. There are two types of futures in the cryptocurrency market: Delivery Futures and Perpetual Futures, which are currently the most popular products in the cryptocurrency market.
Futures is traded with leverage on margin trading, allowing investors to take higher risks and profit from the price fluctuations of different crypto investments. Margin trading is performed by the investor with the trust provided by the broker or the exchange. Margin trading uses the principle of leveraged investment, allowing small capital as a margin to amplify your potential profits while trading, and also magnifying your potential risk of loss, enabling investors with limited capital to trade in the financial markets.
Unlike the spot market, you trade contracts in the futures market but do not own the crypto asset. In fact, futures is designed to avoid market volatility. When you trade the BTC/USDT contract, you are not buying or selling BTC but trading based on the predicted value of BTC. In other words, you are betting on the changes of BTC price parallel to the contract value, and do not own the asset.
In short, contract is a crypto asset derivative that allows users to choose to buy and long or sell and short to profit from the rise or fall of digital asset prices by judging the market.
In the cryptocurrency market, contracts can be divided into USDT-Margined Contract and Coin-Margined Standard Futures in terms of margin trading.
- USDT-Margined Contract
The USDT is used to open positions and for final delivery. Whether you long or short a contract, you only need to deposit USDT in your contract account, and the final profit or loss will be settled in USDT.
- Coin-Margined Standard Futures
Coin-Margined Standard Futures means that the corresponding cryptocurrency is used to open positions and for final delivery. For example, if you want to long or short BTC, you need to deposit BTC in your contract account, and the final loss or profit will be settled in BTC.
In general, investors can choose the contract type according to the trend. When the short-term price is up, you can choose to long the Coin-Margined Standard Futures; when the short-term price is down, you can choose to short the USDT-Margined Standard Futures.
What is Perpetual Futures?
Perpetual Futures is an innovative derivative in the cryptocurrency market similar to Delivery Futures. However, there is no delivery date for Perpetual Futures, and users can hold them forever. The exchanges will generally adopt funding rate to ensure long-term convergence between Perpetual Futures price and Spot price.
The funding rate is the settlement of funds between all longs and shorts in the Perpetual Futures market, which is settled every 8 hours. If the funding rate is positive, the longs pay funds to the shorts. If negative, the shorts pay to the longs.It can be considered as a fee for the trader to hold a contract position or a refund. This mechanism balances the demand for Perpetual Futures between buyers and sellers and keeps the price of Perpetual Futures largely in line with the price of the crypto asset. Perpetual Futures is currently the mainstream of cryptocurrency exchanges, with leverage of up to 125x, and is the most popular derivative in the market now.
From trading perspective, it is divided into long position and short position.
- Long Position = Buy Up
When you think the value of the contract or the price of the crypto will rise in the future, you can choose to long the contract and make a profit if the crypto price rises in the future.
- Short Position = Buy Down
When you think the value of the contract or the price of the crypto will fall in the future, you can choose to short the contract and make a profit if the crypto price drops in the future.
Suppose a buyer thinks that the price of Bitcoin will rise in the future and opens a long position with 5X leverage and chooses [Isolated Margin]. The following scenarios will happen:
- When Bitcoin price rises by 10%, the buyer closes the position with a 50% profit.
- When Bitcoin price drops by 10%, the buyer closes the position with a 50% loss; when Bitcoin price drops by 20%, the buyer suffers from forced liquidation with a 100% loss. If the buyer chooses [Isolated Margin], the buyer's margin will be zero.
Suppose a buyer thinks that the price of Bitcoin will drop in the future and opens a short position with 5X leverage and chooses [Isolated Margin]. The following scenarios will happen:
- When Bitcoin price drops by 10%, the buyer closes the position with a 50% profit.
- When Bitcoin price rises by 10%, the buyer closes the position with a 50% loss; when Bitcoin price rises by 20%, the buyer suffers from forced liquidation with a 100% loss. If the buyer chooses [Isolated Margin], the buyer's margin will be zero.