Introduction to Cryptocurrency
The Cryptocurrency market continues to grow daily with massive adoption going on across the globe. And with this growing adoption comes the surge in demand for cryptocurrencies as a medium of exchange for payment of goods and services.
This growing demand for cryptocurrencies creates opportunities for investors and short-term traders to begin to step into the crypto market and speculate on the movement of the future price.
In this beginners guide, we will be breaking down what Spot Trading vs Leverage Trading really means. We will also be going into details on how they work, and how you can get started buying or selling any cryptocurrency using either the Spot Trading or Leverage trading method.
Spot Trading vs Leverage Trading: What Is Crypto Trading?
Basically, the term Crypto Trading involves making price projections or bets on crypto assets. These price projections could be for two crypto assets (i.e crypto to crypto trade BTC/ETH) or between a crypto asset and a fiat currency (i.e crypto to fiat trade BTC/USD).
For Example:
- As a crypto enthusiast, you might believe that Bitcoin is still very undervalued and there is a very high possibility that the cryptocurrency will reach a $100,000 for 1 BTC sometime in the future.
At this point, you already have a price projection and would love to buy Bitcoin against the Dollar. This is an example of Crypto to Fiat Trade (BTC/USD). Here, you are buying the Bitcoin, believing that the crypto price will keep on rising higher.
If your bullish bias plays out, then the difference between where you go in for that buy trade on BTC and where you finally got out would be your gain.
There are different approaches that can be utilized to place the above example trade. And each of these approaches have their unique features, strengths, and weakness. Here we will be talking about the Crypto Spot Trading vs Leverage Trading method and explaining what they are all about and what their unique features are.
What is Crypto Leverage Trading?
Leverage trading is a form of investing in the financial markets by using extra money to gain staking power in the trading process. It can also be called “contract trading “ because you do not own the asset instead you are trading leveraged contracts on the underlying assets.
The basic idea behind this method of trading is to increase the staking strength of the trader in taking sell or buy option in the trading process. This increase in stake is achieved by borrowing extra money from your broker or crypto exchange. This borrowed money is called “leverage”.
This Crypto Leverage Trading approach is highly risky and not suitable for beginners, though it is a good way to make good profit from the market if the price predicted plays out.
Quick Facts about Crypto Leverage Trading
- Leveraging a crypto trade means you can trade more that the money you actually funded in your account. The amount leverage a trader can take depends on the crypto exchange offer.
- A trader needs to make an initial deposit before leverage can be offered by the exchange.
- Exchange will refer to the deposited amount as the collateral.
- When trading crypto assets with leverage, trader does not get ownership of the underlying asset but instead only trading the mirrored price of the asset in question.
- Though leverage is a useful tool in crypto trading to increase potential returns, it can also result in significant losses and higher risk of liquidation.
- Leverage can be used to trade various crypto derivatives, as well as margin trading, leveraged tokens, or futures contracts.
The PROS and CONS Of Crypto Leverage Trading
Crypto leverage trading offers increase in staking power by providing extra money to the trader’s invested collateral. The advantages and disadvantages of crypto leverage trading can be viewed as follow.
Advantages of leverage in crypto trading
1) Provision of extra purchase power
The most fascinating and advantageous part of leverage in crypto trading is that it gives trader the ability to buy more than the invested amount of collateral committed to broker or exchange. It allows more positions to be taken.
2) Creates new possibilities for investing
Leverage trading allows trader to have an expanded account with a fixed amount. Having an expanded account may expose the trading account to more risk but will provides a stream of opportunities to earn extra money into your account if the trading played as expected.
3) Flexibility of trading
Leverage crypto trading can greatly improve trader’s portfolio by enabling flexibility. Significant gains can be made from a well-managed account. With a reasonable profit from leverage trading, broker’s interest can be paid without stress and the trading still get buffered for taking other trading positions.
4) Improvement on trading potential
Crypto leverage trading allows traders to trade with extra money giving an avenue to step up their trading capacity. Traders are permitted to trade for extra contracts, assets, and many more. Trading with leverage offers the opportunity to implement new trading techniques and improve trader’s potential.
Leveraged crypto trading provides more trading power to traders among other advantages. With all these upsides, there are many drawbacks and risks associated with it.
Disadvantages
1) Increased risk to lose invested capital
The more the leverage the less the margin, this poses a huge risk on trading account. Dangerous trading outcome can wipe out a trading account and result in debt since you have to pay the interest on the leverage and other associated fee.
2) Multiple complications
Sometimes, it becomes frustrating when brokers refuse to support your trading demands unless you increase margin. Increasing your margin also increases the risks associated with your investment. Through margin call, brokers notify trader of poor performance, which can result in account closure.
3) Dangerous for novices
Cryptocurrency market is a volatile market that requires understanding of how the market works. This can be achieved through research and study. Leveraged crypto trading is a more technical aspect that require expertise to be successful.
In order to excel in this trading, beginners need be skilled and knowledgeable in this area. Novices need to put in a great work in order to engage in leverage crypto trading. Even with skills, beginners need to be careful of taking dangerous positions.
4) Required preparation for unfavorable situations
Trading with leverage is a risky strategy. Every successful trader must be strategically aware of the risk involved and be prepared to guide against losses. Traders may diversify cryptocurrency among exchanges with different leverage offer and trade using an excellent strategy.
Summarized Pros and Cons of Crypto Leverage Trading
| PROS | CONS |
| Profitable for experienced traders | Not suitable for beginners |
| High-reward | High-risk involved |
| Applicable to spot and derivatives markets | Additional fees involved |
| Leveraged tokens can be used | Requires understanding of technical indicators |
Check out this article: A Beginners Guide To Crypto Leverage Trading
What is Crypto Spot Trading?
Crypto spot trading is a system of trading crypto asset at the present market price on the spot. It is the most popular method of buying and selling cryptocurrencies. One can purchase or sell a cryptocurrency at the current market price through spot trading, instantly exchanging your cryptocurrency for fiat currency or other cryptocurrencies by placing a buy or sell order.
As against leveraged crypto trading, you get the ownership of asset you purchased through spot trading. Cryptocurrencies can be saved in wallets. The goal of spot trading is to buy low and sell high in order to make a profit, but this doesn’t always play out due to price fluctuation and uncertainties in the crypto market.
The current price of any asset is called the spot price, and the traders can sell or buy this asset instantly at this price.
Still through this spot trading, users can sell or buy cryptocurrencies at the present price through various methods available on the exchange platform. One unique feature of this style of investing is that it doesn’t require borrowing of money to the initial invested capital. You are eligible to trade the exact amount you have in account with less risk.
How Does Crypto Spot Trading Work?
Crypto spot trading allows purchase or sale of cryptocurrency with payment “on the go”. It enables exchange of cryptocurrencies, NFT, fiat currencies and others.
It is the most common and simplest system of trading in crypto world. The goal of this trading strategy is buying cryptocurrency at current market prices and selling it later at a higher price using the price difference between the periods to make gain.
Crypto Spot traders frequently use a variety of fundamental and technical analysis approaches to make trading decisions.
Trading in spot market must start with funding your account with fiat currencies or cryptocurrencies of choice. There are numerous method of purchasing or selling cryptocurrencies on the exchanges. For example, users may spot trade 1 unit if BNB coin at the market price to other coin or fiat currency as the case may be.
Check out this article: Crypto 101: What Drives The Crypto Market Price?
The Types of Crypto Spot Market
Crypto spot trading usually occur in two different markets — OTC markets and cryptocurrency exchanges.
1) Market Exchanges
Cryptocurrency exchanges are the pillars of the cryptocurrency industry. Spot trades are executed mainly on cryptocurrency exchanges trading platforms. The exchanges can be centralized (CEX) and decentralized (DEX).
Centralized exchange like Binance offers spot trading on their platform for a cryptocurrency pair at the spot price, like trading BNB/USDT pair at the market price of the base currency.
2) Over-the-Counter (OTC)
OTC or over-the-counter trading refers to transactions on P2P (peer-to-peer) platforms. With this trading style, crypto assets are exchanged directly between individuals or organizations.
OTC trading usually takes place on platforms where there is sufficient number of sellers or buyers.
Advantages of Crypto Spot Trading
- it is easy to execute, even for beginners
- In spot market traders take ownership of the purchased assets
- The risks are minimal due to the absence of such complicated notions as margin, leverage and liquidation.
Disadvantages of Crypto Spot Trading
- Trader takes the ownership of the cryptocurrency, hence, they are burdened with keeping it.
- Spot market doesn’t allow leverage, this will reduce the opportunities for greater profits.
- Owners of the purchased cryptocurrency can only make gains when the market is bullish, during the bearish trend, the investor’s assets will lose their value.
The Key Differences Between Crypto Spot Trading vs Leverage Trading
| Crypto Spot Trading | Crypto Leverage Trading |
| You own the crypto you buy | You are only trading contracts on the underlying crypto assets |
| There is no use of leverage, you can only trade with the money in your account | Employs leverage that could be as high as x100 |
| Is lower risk with little to no chance of liquidation or margin calls | Is higher risk and requires more in-depth knowledge about the market |
When trading the spot market, traders purchase the true underlying asset, for example, a stock or a cryptocurrency. Whereas in leverage trading, one only buy the contract that mirrors the price of the real asset.
By evaluating the risk involve in both trading strategies, spot trading offer a less risky trading opportunity while the risk involved in leveraged crypto trading is higher especially when a trader is working with large leverage ratio. Though more leverage gives more return, but in a case when market goes the other way, it will result in debt or account closure.
Spot Trading vs Leverage Trading: Conclusion
Cryptocurrencies are effective financial tool for making profit due to its market structure, and trading with it could bring awesome results and fortune to crypto traders and holders. On the contrary, it is the most volatile and dangerous asset.
Combining crypto with leverage trading may present a profit promising venture due to the fact that both will produce a complementary effect in yielding profit, in order to actualize this, appropriate trading knowledge and skill must be employed. Cryptocurrency is wild, trading crypto with leverage could get even wilder.
Check out this article: 5 Steps To Finding The Crypto Investment Style That Suits You. Beginners Guide
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