Spot Vs. Derivative Trading, What Is The Difference?

If you are involved with the cryptocurrency space, you have come across spot and derivative markets. Both are avenues that allow traders to profit from price movements. The most popular exchanges will feature comprehensive platforms with access to both markets. This piece will try to explain the difference between the two and the opportunities that can be found in both markets. 

Spot Trading

This happens on spot markets where you get to buy and sell the actual digital assets on offer. Some exchanges will have more coins/tokens listed compared to others. Therefore, it’s up to you to decide which asset you would like to purchase and open an account where it is offered to trade it. The process is relatively straightforward. First, you will have to sign up on the platform by providing personal details such as email address, phone number and setting a strong password. 

Continue verifying the account and setting two-factor authentication (2FA) to strengthen your account security before funding it. Once the funds reflect in the account, visit the spot market and buy the coin of your choice. The goal is to buy cheap and sell high. And since the crypto market is quite volatile with sharp rises and drops in price, there are plenty of opportunities to profit within this market. Most platforms will offer tutorials on how to go about buying and selling on the spot market. Also, you will need to do some technical and fundamental analysis to know the right time to enter and exit positions. This requires a bit of learning from your side. Unlike CFD trading, even if the price of your asset drops, the number of coins you hold will remain the same; it’s only the dollar value that changes. 

Sometimes the market might go against you and take a while before the price returns to a profitable position. You will have to hold on to your assets for a while since you don’t want to sell at a loss. Therefore, you need to invest in a hardware wallet to store your coins offline safely. This means that even if the platform you’re using gets hacked, your funds will be safe. 

Derivative Trading

This happens on derivative markets. Here you get to trade financial instruments attached to the actual asset, such as a contract for difference (CFDs). This financial derivative product pays the difference in settlement price between the opening and closing of a trade. The good thing with this form of trading is you don’t have to buy the actual asset like spot markets and have to deal with having to store it safely. Also, you get to profit if the asset price rises or falls. This is possible by taking longs and shorts. Platforms such as PrimeXBT will allow you to access CFDs for top coins such as BTC, ETH, and many more. You get to trade with leverage that boosts your capital and potential gains. However, your losses are also magnified, and it is easy to get your account wiped out if you are not careful. It’s good to invest time to understand how to trade these markets and practice sound risk management. Luckily most platforms will offer plenty of educational resources you can utilize to improve your knowledge. 

Also, a platform such as PrimeXBT will allow you to copy the trading strategies of expert traders and get to enjoy their success. This is possible through the Covesting copy-trading module that boasts hundreds of trading strategies by other traders arranged in terms of their success. 

That said, spot and derivative trading both provide traders with ways to profit from the crypto market. On one side, the spot market is quite simple since you need to buy and wait for the price to rise before selling and keeping the profit. However, you need to store your coins safely or risk losing them for the waiting duration. On the other hand, derivative markets only require funding your account with fiat, and you can trade whichever asset CFDs you like. Thanks to leverage, your capital receives a boost increasing your potential gains. And the wonderful thing is you get to profit whether the underlying asset price rises or falls. 

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About the Author: Andrew

Andrew is a professional writer with 7+ Years of experience. His style and uniqueness inspire and educate readers throughout the world.

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