Introduction
Margin Trading: Meaning
There are two methods to start a margin trading position:
- Taking a short position is betting that the price will fall.
- A long position is one in which you wager that the price will increase.
Futures Trading: Meaning
Investors can safeguard themselves from volatile market conditions and ensure that they can buy or sell a particular cryptocurrency at a specific price in the future via futures. The trader may, however, purchase Cryptos for more than the market price or sell them at a loss if the price changes against their wishes.
Some statistics:
Understanding the Mechanics of Margin Trading
Understanding the Mechanics of Futures Trading
- A futures contract’s expiration date: when settlement is completed under the stated conditions;
- The value of the contract: the quantity of bitcoin used as the contract’s underlying asset;
- Leverage: On some exchanges, traders may borrow money to expand the size of their positions and raise their chances of profiting;
- The settlement method might typically be a bank transfer, a cryptocurrency, or cash in hand.
Similarities
- Opportunity
- Purpose
Differences
- Different markets
- Leverage
- Collateral allocation
- Duration
- Investors
| Margin Trading | Future Trading | |
| Markets | Spot market | Derivatives |
| Leverages | 5-20% | >100% |
| Collateral allocation | Loan with interest | Good faith deposit |
| Duration | Up to the trader | Have an expiration date |
| Types of investors | Short-term | Long-term |
Risks
Margin trading
- Because of the leverage component, crypto margin trading is riskier than regular trading. It may result in the investor losing more money than they initially had.
- Given the extreme volatility and unpredictability of cryptocurrencies, the investor may need to contribute additional monies to the collateral to avoid being compelled to sell.
- Investors begin paying interest on the loan they took out to margin trade on the first day, and the debt grows as the interest accumulates.
Always remember leverage trading is EXTREMELY dangerous. True story: I walked into a glass wall at the airport while I was watching my trade. Please be aware of your surroundings if you are going to trade.
— Ben Armstrong (@Bitboy_Crypto) January 18, 2023
Futures trading
- The biggest risk in futures trading is the heightened leverage investors can request with their already speculative positions.
- Futures frequently have access to far higher leverage levels than the underlying assets, which increases the danger of a margin call that might prolong losses.
- The price of a futures contract may not be in the investor’s favor at the expiration date due to the tremendous volatility of the cryptocurrency market.
Conclusion
In a futures contract, a buyer or seller commits to buy or sell an underlying asset at a future price. You can go long or short on futures, depending on your directional bet.
