Futures and margin trading are popular among traders who want to increase their trading capital and make a greater profit.
Although there may be some similarities between the two, they are two different trading alternatives.
In this post, we explore the key differences between futures and margin trading and help you determine which of them may be more profitable for your portfolio.
Post Summary
- What Is Futures Trading?
- What Is Margin Trading?
- Futures Vs Margin Trading
- Futures | Margin – Which Is More Profitable?
- Conclusion
1. What Is Futures Trading?
In the financial market, futures trading is a contract or agreement to buy or sell an underlying asset at a certain date and price.
In the crypto market, however, futures trading is designed explicitly for crypto assets like BTC and ETH.
What happens is that traders enter into an agreement to buy or sell a specified crypto asset at a defined date and price.
The goal is to allow traders to predict the price of a coin and make a profit if their predictions are accurate.
For example, let’s say the price of BTC is currently at $20,000, and I believe it will hit $21,000 at a later time.
I can decide to enter into a futures contract and open a position to buy (Long) BTC at the price of $20,000 with the expectation of closing (Take Profit) at $21,000.
Another important advantage of futures is that it allows traders to use leverage so as to potentially make a bigger profit.
What is leverage, you may ask?
Leverage allows traders to borrow funds from an exchange to amplify their trading capital.
For example, a trader with 10x leverage can control a position worth ten times more than their initial capital.
But there is a catch:
To obtain leverage, a trader needs to keep some of their own money (trading capital) in their account as collateral.
For example, let’s say a trader has $100 in their trading account and they want to open a position in BTC with a 10x leverage.
This means that he can open a position worth $1000, by borrowing $900 from the exchange.
In this case, the trader’s collateral would be $100, or 10% of the total position.
Subsequently, if the price of BTC rises, the trader makes a good profit but, if it falls, the trader experiences losses.
If eventually, the trader’s losses exceed their collateral, the exchange may issue a margin call, asking the trader to top up his collateral.
If he fails to do so, the exchange will liquidate the position to limit further losses.
Leverage applies to both futures and margin trading, as you will see in the next section.
Also read: Leveraged Tokens – Make 3x Return On Your Crypto Investments | Exchanges To Buy From
2. What Is Margin Trading?
Margin trading enables traders to leverage their positions, allowing them to trade with larger sums of money than they would have been able to trade with.
Simply put, it is a method of trading where traders deliberately borrow funds from an exchange to amplify their gains.
Here is an example:
James is a trader who has $100 as his trading capital.
Fortunately, he heard about a coin named NBC
As a result, he used his $100 trading capital to open a trade to “long” NBC in the margin market with a 10x leverage.
This means that he used a total of $1000 to enter his trade, i.e., $100 x 10.
Inferring that James had borrowed $900 from his exchange to start his trade.
Luckily, the NBC coin later appreciated in value by 60%.
Of course, this means that James has made a $600 profit (1000 x 60%) against $160 (100 x 60%) if he had traded only with his capital. This is all thanks to margin trading.
Now, margin trading is similar trading to futures in that it allows traders to amplify their returns using leverage.
Nevertheless, both are two separate options. Continue to the next section to see the differences between the two.
3. Futures Trading Vs Margin Trading
i. Expiry Date
An expiration date means that a particular trade has a time limit.
In margin trading, there is no expiration date.
A trader can hold a position for as long as he wishes without being liquidated, provided that he has enough collateral to offset any potential losses.
Conversely, futures trading has two types:
- Time-bound: These are futures contracts with an expiration date. The expiry dates can be quarterly, bi-quarterly, weekly, etc.
- Perpetual: Similar to margin trading, these futures have no expiry date.
ii. Leverage
Futures contracts typically have higher leverage than margin trading.
On Binance, for example, “margin” has a maximum of 10x leverage, while “futures” has up to 125x leverage.
Also read: Top 9 Crypto Futures Trading Platforms – Exchanges With High Liquidity
iii. Funding fee vs interest
In margin trading, traders obtain leverage through a traditional interest-bearing loan.
This is to say that they pay a specified interest rate on their leverage.
In futures trading, however, traders do not pay interest on leverage but may have to pay a “funding fee.”
iv. Actual asset vs underlying asset
In margin trading, traders buy or sell the actual asset on the spot market.
E.g. a margin trader who buys 1 BTC will receive 1 BTC in his trading account.
On the other hand, in futures, traders do not buy or sell the actual asset; instead, they enter into a contract.
In addition, trades can also be settled using a different coin depending on the type of contract being traded.
v. Number of assets
The crypto futures market typically offers more assets than the margin market.
vi. Risk
Futures trading is generally considered riskier than margin trading due to its higher leverage options.
vii. Market Condition
Futures trading allows traders to profit from both sides of the market, whether the price is going up or down. The same cannot be said about margin trading.
Continue to the next section.
4. Futures | Margin – Which Is More Profitable?
Without a doubt, both futures trading and margin trading are profitable.
However, how profitable a trader will become in each type of market depends on a few factors:
- Trading skill – The trader’s ability to conduct market analysis.
- Strategy – How successful the trader’s trading plan is and how proven it has been overtime
- Risk tolerance – The trader’s commitment to practising proper risk management.
- Market condition – The trader’s acumen for studying the market both volatility-wise, sentiment-wise, etc
If you are looking for an exchange to begin trading crypto futures or margin, here is a list of my top 5:
These exchanges have a strong reputation for their high trading volume, large user base, and excellent security.
Also, you earn a welcome bonus perk by signing up with the link attached to each exchange.
Note:
Both futures and margin trading carry a significant risk since they involve using leverage.
As a result, if the market moves against a trader’s position, they can lose their entire investment.
5. Conclusion
Futures and margin trading are advanced trading options that can help traders amplify their returns.
Yet, they also carry significant risks.
It is important that traders understand both trading types and create a viable trading strategy so as to exit trades profitably.
Do you have further questions about futures and margin trading?
Drop them in the comments box below.
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