Key Highlights:
- Spot Trading is a simple and low risk method which gives direct ownership of the crypto.
- Perpetual Futures allow traders to make profit from the ups and downs of the crypto market.
- Derivatives such as perpetual markets are now dominating the crypto markets.
In recent times, the use of perpetual futures or perps has taken over when compared to spot trading within the crypto market. The main reason why this shift has taken place is because perps offer something that is much more useful to the traders than spot trading ever could. Perps offer flexibility, leverage, and on-chain activity which brings great volumes on the decentralized platforms.
What are Perps?
Perpetual Futures are crypto trading contracts that do not carry any expiry date attached to them. They follow the price of the assets like Bitcoin (BTC) or Ethereum (ETH) and let traders go long or short using leverage. There are times when these leverages can go up to as high as 100x. All of this without having to hold the crypto.
How these Perps work?
The user first has to lock in some amount of money as security on the exchange. The exchange then lets you borrow extra money so that the user can make the trade even bigger.
After every few hours, traders pay each other a small fee so that the contract price stays close to what the actual market price is. However, if the trades go badly and if the security money runs low, the exchange will automatically close your trade to stop any further losses. Prices, on the other hand, are taken from live market data sources.
What is Spot Trading?
Perps is comparatively a little more complex than spot trading. Spot trading simply includes buying or selling of crypto at the current price. Once the user buys a crypto, it is then automatically deposited into the wallet immediately. There is no system of leverage here and this is what makes it simpler and safer. This system is perfect for traders who want to invest in crypto for long-term holding.
Spot Trading vs Perpetual Futures
In spot trading, the user has to own the crypto in their wallet but on the other hand, in perps, the user does not have to own the crypto by any means. This is because in perpetual futures, the user is only making use of the contract (that does not have any expiry date) and the tracking of the price is done by the contract itself.
In spot trading, if a user buys crypto, they can only make profit when the price of the crypto goes beyond the price at which the user bought the crypto. Meanwhile, in perps, the users have an option of taking two types of positions, long or short. If they are going long, it means that they are betting on the price of the token to go up and if they are going short, then they are betting the price to go down. In long, if the price actually goes up, the user makes profit and in short, if the price actually goes down, then the user makes profit.
So unlike, spot trading, where users can earn only if the price goes up, in perps, users can earn from the rise and fall of the price of the token.
Spot trading does not allow part payment, instead, they need full payment upfront. Perps, however, allow leverage. In this way users can actually control huge positions with less money. But users need to keep in mind that more the leverage, more is the risk.
Spot trading is usually a safer option because users only lose what they have invested, whereas, in perps, leverage can increase losses and positions can be liquidated if margins run low.
When users buy crypto in spot trading, users can hold them for years but with perps, the user is trading a contract and not a crypto. Even though these contracts do not expire, users can keep them open but users should have enough collateral so that the losses can be covered. If the market somehow moves against the user, then the exchange is forced to close the user’s position so that they do not incur great losses. This is what is called liquidation.
Spot trading is useful for users that want to hold crypto for long-term and perps are for those who want to earn through short-term hype or speculations.
Why Derivatives Now Dominate Crypto Markets?
From the above comparison, it is clear that spot trading is rigid when it comes to crypto trading and perps on the other hand provide users with flexibility where they can make money if the price of the said cryptocurrency falls or rises. Traders can enter the market with small amounts using leverage, buy and sell anytime without having to wait and these are the main reasons why traders and big institutions prefer them.
The change has been significant. Perpetual futures make up about75-80% of all crypto trading, which means most of the trading is happening through these derivatives and not through spot trading. Every day, traders are shifting around $24-25 billion in derivatives, and the total bets in Bitcoin futures are more than $66 billion. This huge number is an indication of how active and committed these traders are in this market.
Final Thoughts
In the end it all comes down to the purpose. Spot trading is simple. It is suited best for long-term holders who want to own crypto without pressure. Perpetual futures on the other hand are built for active traders who want flexibility, leverage and ability to to profit in both rising and falling markets.
From the data, it is clear that the pattern has now shifted to a place where speed, speculation, risk management and derivatives have become the main force that shape today’s crypto markets.
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