What is margin trading?
Margin trading is a strategy allowing investors to buy more assets without using their own funds. Instead, they borrow funds from a broker.
Similar to traditional margin trading, cryptocurrency margin trading is based on a loan, used for trading digital assets. The margin is the money borrowed from a broker, and the difference between the total value of the investment and the amount of the loan.
In order to trade crypto with margin, the investor has to be authorized by the service provider and open a margin account where he can deposit crypto, cash or securities as collateral for the loan. Keep in mind that in margin trading, the leverage will amplify both gains and losses.
How does it work?
To trade on margin, crypto investors borrow money from a brokerage firm. They deposit cash into a margin account, and after that they can start paying interest on the borrowed money.
The amount an investor can borrow depends on the price of the asset purchased, as well as the collateral’s value.
Usually, a broker will offer to borrow up to 50% of the purchase price of a cryptocurrency.
What is futures trading?
Futures are a derivative contract tying the buyer and the seller of a cryptocurrency to execute the deal at the given price at a given date in the future.
Many crypto enthusiasts choose to invest through futures trading, instead of actually buying and selling it.
The crypto futures trading terms are indicated in a futures contract, tying the buyer to receive a crypto asset at the predicted price, on the specific date. The seller must also deliver the asset at the same conditions.
Of course, it is possible to lose money in futures trading, but because of the hedging element, losses are often mitigated and less dramatic, compared to margin trading.
How does it work?
The futures trading process happens regardless of the actual price of the asset at the future date. It is being regulated by futures exchanges that should guarantee the fulfillment of the contract.
Futures contracts include:
An expiration date of the futures contract, when it is settled at the predetermined conditions;
The contract value - The amount of crypto forming the underlying asset;
Leverage - Some exchanges allow traders to borrow funds, so they can increase their position size;
Settlement type - It can be in cryptocurrency, cash or through a bank transfer
Similarities and differences
Both margin and futures trading can be seen as similar investment tools, allowing investors to buy more of a crypto asset. However, they are both speculative instruments, with the same goal, but different approach.
Both margin trading and futures can bring back great returns, as well as extreme losses.
One of the biggest differences between margin trading and futures is the market they are trading. While margins are traded on the spot market, futures are contracts exchanged in the derivatives market.
Furthermore, margin trading in crypto has a leverage of about 5 to 20 %, while in futures it is common to exceed 100%.
Moreover, margin trading is popular among short-term investors, while futures refers more to long-term crypto investors.
Risks
Both margin trading and futures hide risks for the investors.
Margin trading is riskier than standard trading, because of the leverage components. Furthermore, cryptocurrencies are extremely volatile and unpredictable assets.
The main risk associated with futures is also the elevated leverage that investors can request with their speculative positions.
Together with the volatility of the crypto market, both margin trading and futures can bring you huge profits, as well as major losses. That is why we always advise you never to invest more than you are willing to lose.