Key Takeaways:
- Crypto spot trading is buying or selling an asset in the spot market at the current market price for immediate delivery.
- Crypto margin trading is using borrowed funds to pay for a trade. The key difference between margin trading and spot trading, therefore, is that margin trading uses leverage.
- Spot trading is simpler, but margin trading can, in certain circ*mstances, amplify gains. However, leverage is a double-edged sword, because it can also amplify losses.
- Which one to choose largely depends on the trader’s risk tolerance and personal circ*mstances.
What Is Crypto Spot Trading?
Spot trading takes place in the spot market. Spot markets exist not only in crypto but in other asset classes as well, such as stocks, forex, commodities, and bonds.
The spot market is where traders buy and sell assets (in the case of crypto, tokens) at the current market price for immediate or very near-term (i.e., in a matter of days) delivery. It is called ‘spot’ because it refers to the act of trading and taking receipt of an asset on the spot. In spot trading, there are three key concepts to understand: spot price, trade date, and settlement date.
Spot price
The spot price is the current market price of an asset and, therefore, is the price at which the spot trade is executed. Buyers and sellers create the spot price by posting their buy or sell orders containing the price and quantity at which the buyer or seller wishes to transact. The spot price fluctuates as existing orders get filled and new ones enter the market.
Trade date
This is the day the trade order is executed in the market. Essentially, it records and initiates the transaction.
Settlement date
The settlement date (sometimes referred to as the spot date) is when the assets involved in the transaction are actually transferred. The time between the trade date and settlement date can vary depending on the type of market being traded — it can be on the same day (e.g., for some money-market securities) or a few days (e.g., typically two days for stocks). For crypto, it is typically on the same day, but may vary across different exchanges or trading platforms.
Given the immediate nature of spot trading, a trader must have the full amount of funds to pay for the trade. For example, if a trader wishes to buy $1,000 worth of Bitcoin (BTC), they will need to have the full $1,000 in their account; otherwise, the trade will not be executed by the exchange or trading platform.
What Is Crypto Margin Trading?
Margin trading refers to the use of borrowed funds to pay for a trade. The key difference compared to spot trading, therefore, is that margin trading allows the trader to open a position without having to pay the full amount from their own pocket. The key concepts to understand in margin trading are leverage, margin, collateral, and liquidation.
Leverage
This refers to the use of borrowed funds to pay for a trade. For example, if a trader wishes to buy $1,000 worth of Ethereum (ETH) at a leverage factor of 5x (i.e., multiple of 5), they only have to pay $200 themselves, and the remainder ($800) is borrowed from the exchange or trading platform. In other words, the trader borrowed to increase their position by 5x. The value of the account balance based on the current market price, minus the borrowed amount, is known as equity. The amount of leverage that can be used varies across different exchanges and trading platforms.
Margin
Because the market price of an asset fluctuates in real-time, so does the equity level. When the equity level drops below a certain threshold (also known as the margin requirement, which is set by the exchange or trading platform), the trader will get a margin call. At that point, they have to sell some or all of their position and/or put more of their own funds into the account in order to bring the equity value back up to the margin requirement level.
Collateral and Liquidation
The assets that a trader has in their account are used as collateral for a loan. If the trader fails to meet a margin call, the exchange or trading platform can sell the assets (also referred to as liquidation) in the account and use the proceeds to pay down the loan.
Let’s take a look below at an example of a margin call:
The trader has bought $1,000 worth of ETH using leverage of 5x (i.e., they borrowed $800 and used $200 of their own funds). Subsequently, the price of ETH drops by 10%. Assuming the margin required by the exchange or trading platform is 15% of the account value, then there is a margin call because the equity level has dropped below the margin requirement level.
The trader will have to come up with $35 by either selling some ETH or putting in more of their own money in order to bring the equity back up to the margin requirement. If they fail to meet the margin call, then the exchange or trading platform can forcibly sell the ETH in the account to help pay down the loan.
Crypto Spot Trading: Pros and Cons
The main benefits of spot trading over margin trading are that it is simpler and does not involve the potential amplification of losses that margin can entail. It is simpler because a trader does not have to deal with things like margin calls and deciding how much leverage to use. Also, with no margin calls, the trader does not face the risk of having to put in more of their own funds and potentially losing more than what they already have in their account.
The main disadvantage of spot trading is that it misses out on any potential amplification of returns that using leverage can bring, which we discuss below.
Crypto Margin Trading: Pros and Cons
The biggest advantage of margin trading is that using leverage has the potential of amplifying positive returns. Let’s take a look at an example of a trader who bought $1,000 worth of Ethereum (ETH) at a price of $1,000 (i.e., they bought 1 ETH), and subsequently, the price rose 10% to $1,100.
Below are the returns with no leverage compared to leverage. In the leverage scenario, assume that the trader used 5x leverage (i.e., they used $200 of their own funds and borrowed the other $800). The return of 50% from using leverage is larger than the 10% from using no leverage.
| Scenario: ETH price up 10% | Return | Calculation |
|---|---|---|
| No leverage | +10% | (1100 – 1000) / 1000 |
| Leverage of 5x | +50% | (1100 – 800 – 200) / 200 |
| Scenario: ETH price up 10% | No leverage |
|---|---|
| Return | +10% |
| Calculation | (1100 – 1000) / 1000 |
| Scenario: ETH price up 10% | Leverage of 5x |
| Return | +50% |
| Calculation | (1100 – 800 – 200) / 200 |
However, leverage is a double-edged sword, because while it can amplify positive returns, it can also amplify negative returns. Let’s assume that instead of rising, the ETH price dropped 10% to $900. The return of -50% from using leverage is significantly lower than the -10% from using no leverage.
| Scenario: ETH price down 10% | Return | Calculation |
|---|---|---|
| No leverage | -10% | (900 – 1000) / 1000 |
| Leverage of 5x | -50% | (900 – 800 – 200) / 200 |
| Scenario: ETH price down 10% | No leverage |
|---|---|
| Return | -10% |
| Calculation | (900 – 1000) / 1000 |
| Scenario: ETH price down 10% | Leverage of 5x |
| Return | -50% |
| Calculation | (900 – 800 – 200) / 200 |
The other key disadvantage of margin trading is the risk of getting margin calls. As previously described, this could mean the trader needs to put more of their own funds into the account and risk losing more than what they initially put in.
Cross Margin and Isolated Margin
Two typical ways to use margin are cross margin and isolated margin:
- Cross margin. This allows the trader to share margin balances across different positions, so excess margin (i.e., equity in excess of margin requirement) from one position can be used to cover margin deficiency from another position. This could potentially be used to help prevent margin calls and/or forced liquidation of a losing position.
- Smart cross margin. Allows margin requirement offsets for positions in opposite directions (e.g., long vs short) and across different product types (e.g., spot margin and futures).
- Isolated margin. This is the margin assigned to a single position and cannot be shared across different positions. Typically, traders might use this when they don’t want margin calls from a single position affecting other holdings in their portfolio.
Spot or Margin: How Do You Choose?
Spot trading and margin trading are two common ways of trading, not only in crypto markets, but also in other markets like stocks, forex, commodities, and bonds. The choice largely depends on a trader’s risk tolerance and personal circ*mstances. The key difference is that margin trading uses leverage, while spot trading does not.
Risk and reward often go hand in hand, so for those who are willing and able to take on more risk for the chance of potentially larger gains, then margin trading could be an option. For more conventional traders, spot trading could be less risky and simpler to execute.
Learn more about how to use the Crypto.com Exchange.
How to Start Spot and Margin Trading With Crypto.com
Users can spot trade and margin trade on the Crypto.com Exchange. Spot trading is supported by both the desktop version and the Exchange App.
Margin trading on the Crypto.com Exchange allows users to borrow virtual assets on Crypto.com Exchange to trade on the spot market. Eligible users can utilise the margin loan as leverage (borrowed virtual assets) to open a position that is larger than the balance of their account. On the Crypto.com Exchange, traders are required to transfer virtual assets as collateral first into their margin wallet.
When borrowing virtual assets, users can borrow:
- in the same type of virtual assets as their collateral (for example, their collateral may be BTC and they may borrow BTC).
- in a different type of virtual asset than their collateral (for example, their collateral is BTC, and they borrow USDT).
See the list of supported trading pairs here.
Due Diligence and Do Your Own Research
All examples listed in this article are for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsem*nt, or offer by Crypto.com to invest, buy, or sell any coins, tokens, or other crypto assets. Returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction. Any descriptions of Crypto.com products or features are merely for illustrative purposes and do not constitute an endorsem*nt, invitation, or solicitation.
Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.
As a seasoned expert in cryptocurrency trading and financial markets, I bring a wealth of firsthand expertise to guide you through the intricate world of crypto spot and margin trading. My extensive knowledge is rooted in years of experience navigating diverse asset classes, including stocks, forex, commodities, and bonds. Let's delve into the key concepts outlined in the article, breaking down the nuances of crypto spot and margin trading.
Crypto Spot Trading:
1. Spot Market Basics:
- Spot Price: The current market price at which assets are bought or sold.
- Trade Date: The day the trade order is executed.
- Settlement Date: When the assets are transferred, typically on the same day for crypto.
2. Immediate Nature and Funding:
- Spot trading demands the full amount for the trade upfront.
- Immediate execution without the need for borrowed funds.
3. Concepts in Spot Trading:
- Pros: Simplicity and absence of potential losses amplification.
- Cons: Misses out on leveraging potential gains.
Crypto Margin Trading:
1. Margin Trading Fundamentals:
- Leverage: Using borrowed funds to amplify the position.
- Margin: The trader's equity level, subject to fluctuation.
- Collateral and Liquidation: Assets in the account serve as collateral, and failure to meet margin calls can lead to liquidation.
2. Margin Call Scenario:
- If equity drops below a specified margin requirement, a margin call is triggered.
- Trader must either sell assets or inject more funds to meet the margin requirement.
3. Leveraging Returns:
- Pros: Leverage can amplify positive returns.
- Cons: Introduces the risk of magnifying losses.
Cross Margin and Isolated Margin:
1. Cross Margin:
- Allows sharing of margin balances across different positions.
- Excess margin from one position can cover deficiency in another.
2. Isolated Margin:
- Margin assigned to a single position and cannot be shared.
- Useful when traders want to prevent margin calls from affecting other holdings.
Choosing Between Spot and Margin Trading:
-
Risk and Reward Considerations:
- Spot trading is less risky and simpler.
- Margin trading involves higher risk and potential for larger gains (or losses).
-
User Choice and Risk Tolerance:
- Decision depends on the trader's risk tolerance and circ*mstances.
- Spot trading suitable for conventional traders; margin trading for those seeking higher risk and reward.
How to Start Spot and Margin Trading With Crypto.com:
-
Crypto.com Exchange Features:
- Supports both spot and margin trading.
- Eligible users can borrow virtual assets for leverage in margin trading.
-
Collateral and Borrowing Options:
- Users can borrow in the same or different types of virtual assets as collateral.
Due Diligence and Research:
- Cautionary Note:
- Examples provided are for informational purposes only.
- Users urged to conduct their own research and due diligence.
- Past performance not indicative of future results.
In conclusion, the choice between crypto spot and margin trading hinges on individual preferences, risk appetite, and market understanding. Whether you opt for the simplicity of spot trading or the potential gains (and risks) associated with margin trading, a thorough understanding of these concepts is paramount for success in the dynamic world of cryptocurrency markets.
