Beginner's Guide: Differences between spot trading, leveraged trading, and Bitcoin contracts - Which one to choose?

Bitcoin spot trading

Spot trading is similar to a regular purchase: you pay and receive the product immediately. For example, if you spend 6000 USDT on a Bitcoin, you obtain the actual ownership of that coin. You can transfer it to your personal wallet or send it to others.

The advantage of spot trading is that the coins you buy belong to you. Regardless of price fluctuations, the amount of coins in your possession does not change. The disadvantage is that you can only make a profit when the price goes up. If the price goes down, your options are limited to selling at a loss or holding patiently.

Bitcoin leveraged trading

Margin trading is a form of spot trading that requires having a certain amount of cryptocurrencies or USDT as collateral to obtain a loan and trade. For example, if you believe the price will rise, you can use your assets as collateral to borrow more USDT and buy more coins at the current price. When the price rises above your purchase price, you sell the coins, repay the loan, and keep the profit.

To short with leverage, if you believe the price will drop, you borrow coins, sell them at the current price for USDT, wait for the price to drop, and then buy more coins with that USDT. The difference in the amount of coins is your profit after repaying the loan.

Gate offers leverage of up to 100x on certain trades. If you are bold and have sufficient capital, you might consider using high leverage on Gate, but be aware of the risks.

Bitcoin contract trading

Contracts are a more sophisticated version of leverage, easier to use since they do not require borrowing or repaying loans. You can trade having coins or USDT, but the variety of contracts is usually limited.

There are two types of contracts based on their duration: perpetual, which can be held indefinitely as long as they are not settled, and futures contracts with weekly, biweekly, or quarterly expiration dates that settle automatically upon expiration.

Contracts, just like leverage, can be settled in the cryptocurrency of the pair or in USDT. In the first case, profits are measured in the amount of coins, while in the second case they are calculated in terms of dollar value.

Comparative Example: Spot vs Futures

Spot trading: If investor A invests 200,000 to buy Bitcoin at 2,000 each, he obtains 100 BTC. If the price rises to 3,000, the profit is 100,000, a return of 50%.

Contract trading: With 100x leverage, A only needs a margin of 20 BTC ( approximately 40,000) to control a position of 100 BTC. With the same price increase to 3,000, the profit remains 100,000, but the return is 250%.

This demonstrates the advantage of contracts: you achieve the same absolute profit but use much less initial capital, which significantly increases the percentage return.

However, contracts also carry greater risks. While profits multiply, so do losses. If losses exceed the margin, the position is forcibly liquidated. That is why it is crucial to set loss and profit limits, and to maintain an adequate margin to avoid liquidations.

Differences between leverage and contracts

1. Mechanics: Leverage involves borrowing from the platform, incurring loan rates in addition to trading fees. The contracts allow you to select leverage directly without the need for borrowing.

2. Definition: Leverage uses small amounts to control larger positions. Contracts are agreements to buy or sell assets at a specific price and date.

3. Regulation: Leverage is often offered by brokers or exchanges. Contracts are standardized products designed by regulated exchanges.

4. Features: Leverage offers 24/7 trading, global market, fewer instruments but more flexibility. Contracts are characterized by their high leverage, transparency, and efficiency.

In contract trading, leverage requires depositing a margin as collateral. This margin is usually a small percentage of the total contract value, allowing control of large positions with little capital.

Legal notice: This article includes third-party opinions. It does not constitute financial advice. It may contain sponsored content.