Traditional stock or virtual currency – no matter what investment thought is on your mind, the understanding of the difference between spot trading and futures trading is pivotal. It helps you make the most of your investment. Today’s post explains the difference between the trading options available with most of the exchanges. Learn and grow your smart investment.
Spot Trading
Spot trading is based on on-the-spot price and decision making. It happens on the current market price of a currency or digital asset available to be bought/sold for immediate settlement. In a nutshell, the evaluation of the asset takes place on the current price, i.e., no past or future speculation involved. In spot trading, the ownership of the asset is transferred to the buyer from the seller immediately as per the contract terms.
Risk Factor: Spot trading is what-you-see-what-you-get kind of trading choices. Hence, there is no risk as the buyer and seller are informed of the outcomes.
The above image from PCEX Member (Panaesha Capital Traders) narrates the spot price of BCH (Bitcoin Cash), DASH (Dash), BTC(Bitcoin), ETH (Ethereum), LTC (Litecoin), XMR (Monero), and other top performing cryptocurrencies (in the INR, USD, USDT, and C2USD market). PCEX Member is a user-friendly, comprehensive, and secure cryptocurrency trading platform in India.
If a buyer wants to purchase a few BCH, he or she has to spend an equivalent value of fiat or regular currency. At the time of taking the above snap, the seller has quoted the best bid price for BCH as INR 38,120 and he or she has 1.8 coins to sell out. The best ask price or the highest price quoted by any buyer was INR 38,129. So, the buyer willing to purchase the asset has to pay (38, 129×1.8), i.e., INR 68,632.20.
The highest and lowest spot price of any asset is made available by the exchange platform to help investors with their decision making.
Futures Trading
Futures trading is based on a future price of the digital asset, and the decision to go into such a trading agreement is purely ruled by one’s speculation. The buyer and seller entering into the futures contract have an opposite view regarding the performance of the asset in question and that serves the match-making ground.
Banking on the Futures price on the expiry date, the buyer accepts the contract and deposits token money commonly referred to as margin rate into the exchange to buy a certain lot size of the given asset. This token money is defined by the exchange i.e. Panaesha Capital Exchange. The deposit is accepted in any Fiat currency (any currency that is issued by a government) including USD. The exchange validates the claim to enter a futures contract by examining the account of the prospective buyer.
The spot price has an impact on the futures price and both go in tandem generally. Once the contract is initiated, the token money is locked with the exchange.
The current price of the asset on the date of expiry or termination of the contract defines the profits and losses of the investors – buyer and seller. If it goes beyond the price what was at the time of contract making, the buyer benefits and sellers loses. On the drop of the asset price, the buyer loses and the seller makes the equivalent profit.
Risk Factor: A substantial risk is associated here as neither of the parties involved in the trade knows the future performance of the asset. They are just betting on their views and logic, which may prove right or wrong.
What if the speculation of the buyer of a futures contract proves wrong and he or she incurs a loss beyond the token money submitted? As the asset value of the purchased token size, based on the futures contract price, dips below 75%, the buyer receives an alert from the exchange regarding the same. The exchange asks for the payment to keep the contract active. If the user doesn’t honor the payment request, the contract is squared off, and the buyer gets automatically removed from the contract.
How does PCEX Member or any other asset exchange platform make a profit out of spot or futures trading? It’s obvious that no business or platform can survive without profit. Whether traditional or virtual currency-based exchange – in both the scenarios, the exchange platform charges a commission for the trade from buyer and seller. Normally, the virtual currency exchange platform maintains low commission. Such a low commission rate provides an edge to the digital exchange platform over the traditional ones. New asset owners also pay a fee for listing their assets on the platform. Exchanges also raise funds through IEOs (Initial Exchange Offerings), STOs (Security Token Offerings), and ICOs (Initial Coin Offerings).
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