The word “leverage” seems appealing to many investors as you can multiply profits. It adopts the concept – ’the more, the merrier.’ Leverage means borrowing money to buy stocks more than the investor owns. Beyond the fad, leverage is a double-edged sword since losses can multiply too.
And recently, the leverage storm has hit the crypto world. As we know, margin Trading and Future trading are the two common leverage trading strategies. And crypto enthusiasts are apprehensive about margin vs. futures.
The blog helps to understand the two primary forms of trading and their similarities and concludes the spot margin vs. futures discussion.
What is Margin trading?
Margin trading is a method for investors to buy more assets by borrowing funds from a broker rather than investing the entire amount themselves. Margin trading in crypto is similar to traditional margin trading.
Moreover, the two essential elements involved in margin trading are
- Margin funding: The loan amount provided by the broker to buy the assets.
- Minimum Margin: The initial deposit by the investors for opening the brokerage account.
Buying on margin means borrowing money from the broker to purchase stocks. So, the money is similar to the loan amount from the broker. What is the benefit of buying on margin? Margin Trading helps you buy more stocks than you can typically afford. All you need is a margin account and a minimum margin to deposit.
So, the assets held in the brokerage account are collateral to cover the credit risk or the losses incurred by the broker to render the loan to the investor. In the case of crypto, the broker or the crypto exchange may liquidate the collateral assets if the investment value drops.
What are margin calls? You must maintain a minimum amount in your account called the maintenance margin. If not, then the broker issues a margin call.
How does Margin trading work?
The fundamental purpose of margin trade crypto is to expand the profits with the borrowed funds from the broker. The first step in margin trading is to open a margin trading account. The investor needs to deposit some funds as collateral for a loan in the account. These funds are called minimum margin.
Further, the broker disburses the loan amount against the collateral or the purchased securities. How much loan does the broker disburse? The loan amount depends on the collateral for the loan and the purchased asset value.
What is a Margin trading example?
Let’s understand how margin trading works practically. For example, if an investor intends to buy $1,500 of cryptocurrency, he should have $750 as collateral in the account. And the broker renders the remaining amount as a loan. So, you can catch a bigger fish with little bait (equity).
What is Future trading?
Stock Market futures are a type of derivative contract. What are derivatives? Derivatives are financial contracts that decide their price from another financial asset. It involves buying or selling an asset at a specific value and predetermined date in the future.
Moreover, over time, the contract’s price changes compared to the price when the trade is made, thus yielding a profit or loss for the trader. The buyer needs to maintain a small margin while initiating the contract.
How does Future trading work?
Commodity futures hedges (limits the risk) while dealing with commodity price fluctuation risks and exploiting the price fluctuation movement. The two main participants of Future trading are:
- Hedgers (who protect their assets from risk)
- Speculators (floor traders)
A future contract must include the following crucial elements:
- Expiration date: The predetermined date decides how long you hold the position.
- Contract value: The amount of crypto for the underlying asset in the contract.
- Leverage: Futures provide the ability to control large contracts with a small amount of capital.
- Settlement Type: Involves crypto, cash, or bank transfer.
You can perform future trading on crypto exchanges like the CME Group.
What is a Future trading example?
In futures and commodities, if you expect Bitcoin’s value (BTC) to rise at the end of the month, you can open a long position by buying a futures contract with a monthly expiry date. The parties in the agreement settle the trade on the expiry date, and the contract closes.
Are Margin trading and Futures the same?
Margin trading and Futures are two different investment strategies with a common goal – earn profits. We often find it challenging to comprehend the difference. However, there are a few similarities between the two:
Margin trading and Futures are investment instruments. Moreover, they help the investors to buy more assets and yield more profits with their equity.
Being investment tools, they aim to build a sound investment portfolio and earn short-term or long-term profits. The crypto market is highly volatile and quite different from the traditional stock market. Hence, the profits and losses incurred could be high, meteoric, yet brief. Hence, investors should be careful and stake under experienced traders.
Following are a few differences between finance margin vs. futures:
|Points||Margin Trading||Futures Trading|
|Type of market||Margin Trading takes place on the spot market.||Future Trading happens on derivatives.|
|Trading pairs||Margin Trading offers exotic trading pairs like AUD and CHF.||Futures Trading operates on a single cryptocurrency like BUSD or USDT rather than exotic pairs.|
|Leverage||Margins have a leverage of 5-20%.||Futures exceed even leverage of 100%.|
|Period||In margins, the traders determine how long you leverage the coin.||Futures are contracts with an expiry date that decides how long you hold a position.|
|Term||Margins are for short-term investors.||Futures are for long-term investors.|
|Collateral allocation||Margin Trading demands a loan with interest as collateral.||Futures Trading needs a good faith deposit as collateral.|
Margin vs. futures ku coin
Kucoin is an advanced cryptocurrency exchange platform that provides cross-trading and isolated trading options in margin trading. Kucoin Futures is the cyptoexchange’s Futures trading platform that only deals with Bitcoin and ETH. Kucoin is one of the trusted crypto platforms and could be your solution for the Futures vs. margin ku coin discussion.
Future vs. margin binance
Futures vs. margin binance reddit has been a crucial discussion on the content platform. Binance is a popular crypto exchange platform that offers leveraged trading in two formats: Margin and Future Trading.
Furthermore, Binance Margin allows users to borrow funds from the platform and calculate the loan’s interest rate in the next hour. Binance Futures is the exchange’s platform for Futures Trading at competitive rates and fees.
Which is better Margin or Futures trading?
Crypto margin vs. futures is an endless debate. They are two different strategies directed to a common goal of an investment. Moreover, the following are the two primary determinants to compare both:
- Experience of the Investor
- Funds at your disposal
In margin trading, investors begin trading by borrowing funds from a broker. In short, it helps you amplify your gain or losses; ironically, it is also a risky bet. On the other hand, Futures are legally binding contracts where you can buy or sell an underlying asset at a future price.
In margins, you have the liability to repay the loans in the future. However, in future trading, a good faith deposit is the collateral; hence you don’t need to repay any funds to the broker. So, consider your resources and choose wisely between margin vs. futures finance.
Do I need a margin to trade Futures?
In the commodity futures market, the buyer or the seller has to deposit a part of the value of the commodity to be bought or sold. This amount is called the margin money or initial margin. Generally, the initial margin is about 3-12% of the future contract value.
The margin vs. futures crypto debate is subjective. The sliver of leverage makes crypto margin trading riskier than standard margin trading. The crypto volatility coerces the investors to pump in more funds as collateral to avoid selling their underlying assets. Hence, it is suitable for short-term investors.
On the other hand, futures are also at risk of a high-margin call. The crypto market is speculative; hence in the future vs. margin dilemma, invest a thought before you stake your funds.