Crypto Spot Trading and Margin Trading | @besticofinder Lesson 3 Assignment
This is an assignment by @besticofinder, a crypto academy professor with regards to his class on How to spot trade? Everything a beginner needs to know.
Explain Spot Trading and Margin Trading
What is trading?
Trading is put simply the buying and selling of assets which can be goods, services, commodities, securities, indexes, and cryptocurrencies between two parties. Unlike the regular buying and selling of goods, trading occurs in the financial market using financial instruments such as stocks, bonds, currencies (forex), options, futures, margin products, cryptocurrencies.
Spot Trading
Spot trading is the trading that involves the immediate buying and selling of crypto assets from one user to another. With makers and takers determining the price of the asset and people can get their order filled when the price reaches the level to trade. With spot trading, traders buy a crypto coin with the aim to sell when it is high and buy again when it is down immediately. Once the bid and ask offers are placed, the trade gets executed immediately.
[screenshot from Binance spot trade]
Margin Trading
With margin trading, borrowed money is needed to trade. This money is borrowed from a third party with the aim of amplifying trades upward and downwards. With margin, traders can trade using less capital while trading a position with large borrowed funds.
With leverage, when a trader uses 2X leverage, the trader is increasing its trading amount by 2 times his initial funds. With leverage, users can open positions up to 150X, depending on the exchange (eg BitMex).
Discuss the advantages and disadvantages of Spot Trading and Margin Trading
Advantage of Spot Trading
- It is the perfect place for beginners to trade coin
- It is a good place to swing trade (profiting off the market trends such as rise and dump).
- Trading is safe and traders can trade from their wallet without incurring debt.
Disadvantage of Spot Trading
- You can only trade with the amount in the wallet which could limit the trading opportunity for the trader.
- One could lose money when the market is giving a different result as to what the trader expects and the trader refuses to sell.
Advantage of Margin trading
- Allows for use of other people's funds which gives a better trading advantage
- Making more gains/profit as larger funds are used to trade.
Disadvantage
*The loss is magnified just as the profit is.
- Traders can lose all of their funds and liquidate if a trade goes wrong.
- The fees are higher and are calculated based on the amount placed (including leverage).
Conclusion
Other types of trading include Derivatives and this is where the major liquidity exists in trading. When trading, either spot or margin, be sure that you can lose all or part of your funds. The crypto market is very volatile and trading should include more knowledge and trading strategy.