Cryptocurrency trading has become a very good alternative for people who are interested in trading but are looking for more volatile assets in order to increase their profits. In the beginning, the only places people could trade with cryptocurrencies were dedicated crypto exchanges, but nowadays regular brokers started to offer crypto CFD trading to customers.
While these brokers have a smaller selection of cryptocurrencies available for trading, there are other benefits that the introduction of crypto CFDs has brought, with one of the biggest ones being the ability to margin trade, but is it better than spot trading? This is what we will be taking a look at today and trying to determine which trading style is the best fit for which type of trader.
Crypto Spot Trading
The most simple way to trade with cryptocurrencies is trading on the spot market. Crypto spot trading is a style of trading where you are buying and selling cryptocurrencies at the current market price by opening certain market orders. So whatever the price is at that moment is the price you are trading with. For example, if you see that the price of Bitcoin is currently low and think it will go up sometime in the near future, you can buy Bitcoin on the spot market and sell it later for a profit. As you can see this is a very easy and straightforward way of trading with cryptocurrencies.
But being an easy-to-use trading style, it also has some downsides. People who trade with cryptocurrencies are called takers since they are taking from the liquidity pool as their orders are being executed instantly. When a buy or sell order is placed on the spot market, the system automatically looks at the order book and tries to match two parties together. So let’s say you want to buy from the spot market and place a buy order, the system looks through the order book and matches you with someone who is selling at the price you want to buy. But in order to make sure that the spot market actually operates instantaneously, some exchanges need high levels of liquidity as sometimes there are cases when it is hard to match two parties. This is why spot traders are called takers since they are taking from liquidity pools and generally have to pay higher trading fees.
Crypto Margin Trading
Crypto margin trading is the crypto trading style where you are trading on the future price of cryptocurrency and the funds that you can trade with are increased by the broker. When opening a crypto order using a margin, you will be able to select the amount of margin you want to use. For example, if you have selected to use the 10:1 margin and want to open an order with $100, you will be able to open an order worth $1000 with $900 provided by the broker as borrowed funds. This is a great trading strategy for those that don’t have large amounts of trading capital.
Margin trading has its ups and downs, and because of this not everyone can use it successfully. Margin traders are called makers, since margin traders are trading with futures contracts, meaning that they are betting on prices either increasing or decreasing. What this means is that a trader might open a long position and if the price increases, he makes profits, if he opens short positions, a drop in price is what will generate profits. Because of this, these traders are creating liquidity as they are creating orders that will be available in the future and a lot of spot traders are actually trading with these margin orders. Because of this, margin traders usually pay lesser trading fees, but they also have to pay margin fees.
Which one should you trade?
Now the question comes down to which of these two trading styles you should use, and the correct answer is both. No one can say definitively that one is better than the other since these two are very common and popular ways to trade. Each of them has its own advantages and disadvantages, and it should be our goal to make sure to take advantage of both of them. If you are looking for long-term trades, and don’t particularly think that the price will go in one direction or another in the near future, then using spot trading is the way to go. Spot trading is somewhat of a short-term HODL, where you buy crypto for what it is worth now, and when the price goes up, you sell it and make a profit. This is a great trading style to use with the money you can spare, as you can buy a token and keep on waiting until you like the new price, and you don’t have to worry about the money you invested, since this is money you can afford to set aside.
Margin trading is great for those that are looking for high profits but are also willing to take on higher risks. If you are someone who is willing to keep an eye on the market throughout the day and willing to learn about different aspects of cryptocurrencies and trading in general, using a margin is the best possible way to trade. You also don’t need to make a big investment in order to make big profits as the margin increases your buying power.
But as we mentioned before, it is best to use both trading styles, and don’t limit yourself to only one of these two. When you see a good opportunity for a spot trade, you should take it, and when you see a good margin option, the potential profits are something you can not ignore as well.
FAQs on crypto spot vs margin trading
Is crypto spot trading risky?
Crypto spot trading is considered one of the least risky trading styles that a person can choose. Since during spot trading you are buying and selling at the current market price, you can decide when you want to trade and are not limited to stuff such as margin calls, futures fees, and so on. You can buy crypto on the spot market and if the price falls, you can just wait for the price to go up again and sell only after this happens. This makes spot trading a very safe and easy way to trade cryptocurrencies.
Should you trade with a margin in crypto?
Using a margin when trading with cryptocurrencies has its advantages and disadvantages, and it comes down to each person’s trading style and goals. Cryptocurrencies are already volatile assets and because of this, there is a possibility of making good profits with a small trading balance and without using a margin. But margin trading can elevate these profits even further and traders can easily multiply their balance several times with just a few good margin trades. The main risk is that if the price moves in the wrong direction you can suffer big losses in a very small amount of time.