How is margin trading different from futures trading? Which tool to choose?

Main

• Margin trading is operations on the spot market with the involvement of borrowed funds. For their use, traders pay a fixed hourly rate.

• Futures trading is operations with contracts to change the price of an asset. Users trade them against collateral and pay or receive a funding rate on open positions every eight hours.
• Trading on futures mainly differs from margin trading in the maximum leverage – up to 125x versus up to 10x.

What is leverage?

Leverage, or leverage, is a mechanism that allows you to open a position for a larger amount than the trader has in his account. With it, you can increase the potential profit with long purchases and capitalize on falling prices through short sales.

Leverage is the ratio of the amount of the position with borrowed assets to the funds allocated by the trader. For example, with a leverage of 10x, a user with a $1,000 deposit can buy or sell $10,000 worth of assets.

Using leverage increases not only potential profits, but also losses. When buying with a leverage of 10x, you can lose all margin if the asset quotes fall by 10%.

What is margin trading?

Margin trading is leveraged trading in the spot market. The trader sells and buys cryptocurrencies, which he can then withdraw to external wallets.

To open a position, he borrows additional funds secured by collateral – margin. The lenders are the trading platform or the depositors of its investment products.

What is futures trading?

Futures trading is operations with derivative contracts (futures), when the parties agree to buy or sell an asset in the future at the price at the time the transaction is completed.

To open a position in the futures market, you need to deposit a margin — an amount that will cover its potential loss.

Perpetual non-deliverable futures are traded on crypto-exchanges: the buyer and the seller place bets on changes in the price of an asset, and upon completion of the transaction, they are settled in stablecoins. They cannot withdraw contracts or request the delivery of cryptocurrencies.

What is margin call and liquidation when trading with leverage?

A margin call is a notification from an exchange requesting that additional margin or collateral be added to a losing position. For example, Poloniex sends a margin call to a trader at a loss of 75% of margin.

Liquidation is the forced closing of a position with the return of the borrowed funds to creditors. Crypto exchanges resort to liquidation when the loss reaches 100% of the collateral.

What are the fees on margin and futures markets?

Trading commissions in the futures market are always lower. This is due to the fact that during spot trading, the exchange moves cryptocurrencies between the accounts of the seller and the buyer, but not with futures.

When holding positions in both markets, traders additionally pay:

• in case of margin trading – the hourly interest rate for the use of borrowed assets. The average rate for Bitcoin, Ethereum and Tether is from 3.65% to 1.27% per annum, depending on the volume of trade;
• in futures trading, the funding rate every eight hours. If the contract is trading cheaper than spot, the buyers pay the sellers and vice versa. Thus, the total funding rate for holders of long positions BTCUSDTPERP on Poloniex in April was 0.754% or 9.05% per annum.

What is the difference between margin and futures trading?

1. Margin trading is conducted on the spot market, while futures trading is conducted on the crypto derivatives market. In the first case, the buyer can withdraw assets to external wallets, but not in the second.
2. The maximum leverage in trading on the margin market is up to 3x, on the futures market – 100x.
3. Position size limit for margin trading — up to 120 BTCon futures — up to 25 BTC.
4. There are more futures contracts than margin trading pairs. For example, 38 futures are traded on Poloniex, while only 12 cryptocurrencies are available for margin trading.
5. Due to higher trading leverage, the futures market is more volatile. This increases the risk of liquidation and closing the position on a stop order.
6. When trading on margin, you need to use two cryptocurrencies for long purchases and short sales. In the futures market, a trader deposits collateral in one currency, regardless of the direction of positions.

What is better for beginners – margin trading or futures?

Best for beginner traders margin trading. It carries less financial risk due to several factors:

• low leverage up to 3x;
• lower spot market volatility;
• fixed hourly rate for the use of funds;
• trade only the most popular and liquid cryptocurrencies.

Futures trading allows you to earn more, but is associated with high risks:

• liquidations using up to 100x leverage;
• accidental triggering of a stop loss when trading contracts with low liquidity;
• slippage when trading market orders during periods of high volatility.

It will suit traders who already know how to manage capital and can benefit from market volatility and high leverage.

Main

• Margin trading is operations on the spot market with the involvement of borrowed funds. For their use, traders pay a fixed hourly rate.

• Futures trading is operations with contracts to change the price of an asset. Users trade them against collateral and pay or receive a funding rate on open positions every eight hours.
• Trading on futures mainly differs from margin trading in the maximum leverage – up to 125x versus up to 10x.

What is leverage?

Leverage, or leverage, is a mechanism that allows you to open a position for a larger amount than the trader has in his account. With it, you can increase the potential profit with long purchases and capitalize on falling prices through short sales.

Leverage is the ratio of the amount of the position with borrowed assets to the funds allocated by the trader. For example, with a leverage of 10x, a user with a $1,000 deposit can buy or sell $10,000 worth of assets.

Using leverage increases not only potential profits, but also losses. When buying with a leverage of 10x, you can lose all margin if the asset quotes fall by 10%.

What is margin trading?

Margin trading is leveraged trading in the spot market. The trader sells and buys cryptocurrencies, which he can then withdraw to external wallets.

To open a position, he borrows additional funds secured by collateral – margin. The lenders are the trading platform or the depositors of its investment products.

What is futures trading?

Futures trading is operations with derivative contracts (futures), when the parties agree to buy or sell an asset in the future at the price at the time the transaction is completed.

To open a position in the futures market, you need to deposit a margin — an amount that will cover its potential loss.

Perpetual non-deliverable futures are traded on crypto-exchanges: the buyer and the seller place bets on changes in the price of an asset, and upon completion of the transaction, they are settled in stablecoins. They cannot withdraw contracts or request the delivery of cryptocurrencies.

What is margin call and liquidation when trading with leverage?

A margin call is a notification from an exchange requesting that additional margin or collateral be added to a losing position. For example, Poloniex sends a margin call to a trader at a loss of 75% of margin.

Liquidation is the forced closing of a position with the return of the borrowed funds to creditors. Crypto exchanges resort to liquidation when the loss reaches 100% of the collateral.

What are the fees on margin and futures markets?

Trading commissions in the futures market are always lower. This is due to the fact that during spot trading, the exchange moves cryptocurrencies between the accounts of the seller and the buyer, but not with futures.

When holding positions in both markets, traders additionally pay:

• in case of margin trading – the hourly interest rate for the use of borrowed assets. The average rate for Bitcoin, Ethereum and Tether is from 3.65% to 1.27% per annum, depending on the volume of trade;
• in futures trading, the funding rate every eight hours. If the contract is trading cheaper than spot, the buyers pay the sellers and vice versa. Thus, the total funding rate for holders of long positions BTCUSDTPERP on Poloniex in April was 0.754% or 9.05% per annum.

What is the difference between margin and futures trading?

1. Margin trading is conducted on the spot market, while futures trading is conducted on the crypto derivatives market. In the first case, the buyer can withdraw assets to external wallets, but not in the second.
2. The maximum leverage in trading on the margin market is up to 3x, on the futures market – 100x.
3. Position size limit for margin trading — up to 120 BTCon futures — up to 25 BTC.
4. There are more futures contracts than margin trading pairs. For example, 38 futures are traded on Poloniex, while only 12 cryptocurrencies are available for margin trading.
5. Due to higher trading leverage, the futures market is more volatile. This increases the risk of liquidation and closing the position on a stop order.
6. When trading on margin, you need to use two cryptocurrencies for long purchases and short sales. In the futures market, a trader deposits collateral in one currency, regardless of the direction of positions.

What is better for beginners – margin trading or futures?

Best for beginner traders margin trading. It carries less financial risk due to several factors:

• low leverage up to 3x;
• lower spot market volatility;
• fixed hourly rate for the use of funds;
• trade only the most popular and liquid cryptocurrencies.

Futures trading allows you to earn more, but is associated with high risks:

• liquidations using up to 100x leverage;
• accidental triggering of a stop loss when trading contracts with low liquidity;
• slippage when trading market orders during periods of high volatility.

It will suit traders who already know how to manage capital and can benefit from market volatility and high leverage.