By Mike Zaccardi, CMT, CFA ·May 05, 2022 · 5 minute read
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Trading crypto on margin in the spot market is different from using futures to control crypto positions. Margin trading involves using money borrowed from a broker to go long or short crypto. With futures, traders can post margin as collateral to take on large long or short positions on contracts with a specific delivery date. Another type of crypto futures contract, perpetual futures, does not come with a delivery date, but it comes with daily fees.
It’s important for crypto investors to understand the fundamental concept of margin vs. futures. Though there are key differences between trading margin vs. futures, there are also similarities between them, and pros and cons to consider. If you recognize how futures vs. margin trading operates, then you can better decide which of these investing strategies — margin vs. futures — to use when building a cryptocurrency portfolio.
Margin vs Futures
Margin vs. futures feature many similarities, but there are also differences to consider. Analyzing both can help you know if these trading techniques could work with your investing style and tolerance for risk. You might decide to have a margin or a futures account, one of each, or neither.
Similarities
Futures vs. margin trading share some characteristics. For one thing, both methods would allow you to control more of a crypto position than would trading the cash, or spot market, using only your equity. The futures market and a margin account simply go about it differently. Both might entice prospective market participants with potentially big quick gains, but losses can be dramatic too.
It is important to remember that cryptocurrencies are usually much more volatile than stock market indexes. So if you trade with margin or futures, you could expect to see fast movements (either up or down) in your profit and loss numbers.
Differences
As we said earlier, identifying the differences between trading with margin vs. futures could help determine the best investing strategy for your risk tolerance and return objectives. For starters, futures trading requires a good faith deposit to access contracts, often with quarterly maturity, while a crypto margin account lets you leverage the spot market. The futures market might require that you pay closer attention to liquidity — that is, how easily you can trade while still receiving a competitive price.
With a crypto margin account, liquidity is generally not a problem in the spot market; knowing how much you can borrow might be the greater issue to consider. Because the spot market is perpetual, you also must determine for how long you want to own a coin. With futures, by contrast, expiring contracts set a limit on how long you can hold a position; however, you may bypass this by using perpetual futures.
It’s also important to analyze is the premium over the spot price that you are paying or are being paid. Further, trading on an unregulated platform or one with a sketchy reputation could result in possible liquidity failures or liquidation.
| Similarities | Differences |
|---|---|
| Margin and futures offer the chance to trade large positions with a small amount of capital | Using margin requires paying a broker interest on your loan |
| Both can result in large and fast losses | Futures trading requires a good-faith deposit |
| With perpetual futures, you can keep an open position indefinitely, similar to how the spot market works, but you also might owe | The futures crypto market can experience premiums to spot prices |
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Margin vs Futures Trading in Crypto
Knowing the differences between margin and futures, as well as the similarities, goes a long way toward protecting yourself from unforeseen risks when trading crypto. Here are several key points to consider:
| Trading Crypto With Margin | Trading Crypto With Futures |
|---|---|
| Incurs daily expenses via interest owed on borrowed funds | Quarterly futures contracts can avoid fees and might be better for long-term holders |
| Liquid spot prices help ensure a fair price when buying and selling | Futures’ basis can fluctuate |
| It is common to trade with between 3x-to-0x leverage | Often higher leverage is employed than with margin trading |
The Takeaway
Trading cryptocurrency on margin, and using futures contracts (including perpetual futures) to control crypto positions are commonly used, through advanced, trading methods.
Each has its own advantages and risks. While crypto margin trading offers exposure to the spot market using borrowed funds, trading with crypto futures lets investors deposit margin as collateral to control large positions for future delivery.
FAQ
Are margin trading and futures the same?
Margin trading and futures trading are two different trading techniques. It’s key to understand both approaches before using them because they are considered advanced. Margin accounts usually involve traders opening crypto positions with borrowed money. You can control more capital with your portfolio, which allows you to leverage positions. You can experience amplified gains and losses with margin trading, so it is riskier than trading without leverage.
Futures contracts work differently in that they are binding agreements where you agree to buy or sell an underlying asset at a pre-specified price in the future. You can go long or short futures depending on your directional wager. With crypto trading, futures are often quarterly or perpetual contracts.
Do you need margin to trade futures?
You need margin to trade futures. Margin in futures trading refers to a good faith deposit used as collateral to open positions. It does not involve borrowing money from a broker, so there is nothing to repay, but you might owe funding rate fees when you own perpetual futures. Your futures account collateral also represents your maintenance margin — a minimum amount of equity needed to continue trading.
What are futures contracts and how do they work?
While margin traders participate in the spot crypto market, futures traders place trades on assets to be delivered in the future. You can think of futures vs. margin as a difference in the price of crypto in the spot market versus futures prices at some point later. Participants in the crypto futures market speculate on the future price of a coin.
You can use leverage in the futures market — some exchanges allow a leverage ratio of as much as 125:1 — using margin as collateral to open positions. Crypto futures might trade at a large premium to the spot market, and it might take a long time to exit a futures position at a competitive price.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circ*mstances.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
*Borrow at 10%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information. Photo credit: iStock/FG Trade
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As an enthusiast and expert in cryptocurrency trading, it's evident that my knowledge extends to various aspects of the crypto market, including trading strategies, risk management, and the nuances of different financial instruments. The article by Mike Zaccardi, CMT, CFA, published on May 5, 2022, provides valuable insights into the comparison between margin trading and futures trading in the crypto space.
Let's delve into the key concepts discussed in the article:
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Margin Trading vs. Futures Trading:
- Margin Trading: Involves using borrowed funds from a broker to go long or short on crypto positions in the spot market.
- Futures Trading: Involves posting margin as collateral to take on large long or short positions on contracts with a specific delivery date or perpetual futures without a delivery date.
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Similarities between Margin and Futures Trading:
- Both methods allow traders to control more of a crypto position compared to trading in the cash or spot market using only equity.
- Potential for significant gains quickly, but losses can be equally dramatic due to the inherent volatility of cryptocurrencies.
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Differences between Margin and Futures Trading:
- Futures trading requires a good faith deposit to access contracts, often with quarterly maturity.
- Crypto margin accounts allow leveraging the spot market without a specific delivery date.
- Futures may require closer attention to liquidity, while margin accounts may have concerns about borrowing limits.
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Commonalities and Differences in Risk:
- Both margin and futures trading can result in substantial and rapid gains or losses.
- Margin trading involves paying interest on borrowed funds, while futures trading requires a good-faith deposit.
- Liquidity considerations vary between the two methods.
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Key Considerations for Crypto Traders:
- Understanding the duration of ownership with perpetual futures and the expiration limit with futures contracts.
- Analyzing the premium over the spot price in futures trading.
- Being cautious about trading on unregulated platforms or those with questionable reputations.
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Leverage and Buying Power:
- Both margin and futures trading offer the opportunity to trade large positions with a small amount of capital.
- Margin loans from platforms like SoFi can provide increased buying power.
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Additional Points:
- Daily expenses in futures trading, such as interest owed on borrowed funds.
- Quarterly futures contracts may avoid fees and could be more suitable for long-term holders.
- Liquidity in spot prices ensures fair trading, while futures' basis can fluctuate.
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FAQs:
- Distinguishing between margin trading and futures trading.
- The need for margin in futures trading.
- Explanation of futures contracts and their workings.
In conclusion, understanding the differences and similarities between margin and futures trading is crucial for crypto investors to make informed decisions based on their risk tolerance and return objectives. The article provides valuable insights into these advanced trading methods, emphasizing the importance of careful consideration and awareness of the associated risks.
