This content originally appeared on DEV Community and was authored by Sandy Nguyen
What is margin trading?
Margin trading is a strategy that allows investors to buy more assets without using their own funds and borrowing funds from a broker instead.
Margin trading in cryptocurrency markets is no different from traditional margin trading. Margin funding is considered a loan to trade a digital asset, where the margin is the money borrowed from a broker and the difference between the total value of the investment and the loan amount.
The assets that form the balance of a margin trading account are used as collateral for the loan to cover the credit risk and potential losses traders may have, especially when trading on leverage. The brokerage firm or a crypto exchange may liquidate a trader’s assets if the value of the investment drops considerably.
In order to trade crypto with margin, an investor needs to be authorized by the service provider to open a margin account where to deposit crypto, cash, or securities as collateral for the loan. In margin trading cryptocurrency, the leverage will amplify both gains and losses, and a margin call may occur with heavy losses, such as a decrease in the securities’ equity value.
A margin call allows the exchange or a broker to liquidate the investor’s collateral without consent or to request more funds into their margin account to avoid a forced liquidation to satisfy the broker.
What is futures trading?
Futures are a type of derivative contract that ties a buyer and a seller of a cryptocurrency to execute the deal at the established price at a specific date in the future.
Some crypto enthusiasts prefer to invest through futures trading instead of dealing with actually buying or selling it through private keys, passwords and generally avoid going through the hassle that most platforms require to trade crypto. At the same time, they have acquired exposure to the asset.
Crypto futures trading terms are indicated in a futures contract, which ties a buyer to receive a crypto asset at their predicted price on a specific date and the seller to deliver that asset at those same conditions when the futures contract expires, regardless of the market price at the expiration date.
Are margin trading and futures similar investments?
Margin trading occurs in the spot market — a marketplace for immediate delivery — while futures relates to trades occurring in the derivatives market on assets to be delivered in the future.
Margin trading and futures trading are two strategies that require the investor to have good trading skills as they are considered advanced trading techniques. They are two different types of investment tools with a similar goal, but they just go about different ways to achieve it.
Margin trading vs. futures: Similarities
Opportunity
Margin trading and futures are similar investment tools. They aim to allow investors to buy more of a crypto asset using only their equity. They are both speculative instruments and have different approaches to achieving the same goal.
Purpose
They can both trigger amplified returns but can cause extreme losses too. Especially in the highly volatile cryptocurrency market, it’s somehow easy to experience significant quick gains. Still, dramatic losses can occur too, so it is recommended that only experienced traders use these tools.
Margin trading vs. futures: Differences
Different markets
The main difference between margin trading and futures is in the market they are traded. Margins are traded on the spot market, while futures are contracts exchanged in the derivatives market and imply the future delivery of the asset.
Leverage
Margin trading in crypto usually has a leverage that ranges between 5 and 20%, while it’s common to exceed 100% in futures.
Collateral allocation
Crypto margin accounts allow traders to leverage the spot market through a sort of loan on which interest must be paid, while futures only require a good faith deposit as collateral.
Duration
Being perpetual, the spot market requires traders to determine how long they want to keep a coin leveraged. On the other hand, futures are contracts with an expiry date that determine how long you can hold a position.
Types of investors
They target two types of traders for executing margin trading and futures. Margin trading is more for short-term investors, while futures refers more to long-term investors.
Happy Trading!!
This content originally appeared on DEV Community and was authored by Sandy Nguyen
Sandy Nguyen | Sciencx (2023-04-24T00:34:01+00:00) Margin trading vs. Futures: What are the differences?. Retrieved from https://www.scien.cx/2023/04/24/margin-trading-vs-futures-what-are-the-differences/
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