The cryptocurrency world can be complicated. When matched with traditional finance, the arena becomes even more complex. Spot and futures trading are two commonly referenced terms in the crypto space worth knowing and differentiating. It is important to know the difference between these two concepts as exchanges start to add more spot assets and futures trading products.
A spot cryptocurrency is the actual digital asset itself. Trading spot Bitcoin (BTC) means you are trading the actual Bitcoin digital asset, which can also be transferred in and out of the exchange to various wallets and locations.
When an exchange adds a digital asset such as Bitcoin or Ethereum (ETH) to its roster of crypto assets available for trade, it means the spot crypto asset is available for trading.
Order books for spot trading on the BTSE exchange are filled with the actual amounts of the assets listed. Selling one BTC on BTSE’s spot market means you are actually selling one physical Bitcoin on the exchange.
Futures trading, on the other hand, is a derivatives trading product of the underlying asset’s price (its spot price), backed by the spot asset. Bitcoin futures trading, for example, essentially involves buying or selling contracts derived from Bitcoin’s price, based on what you think its future spot price may be. In general, Bitcoin’s futures prices usually should be close to their underlying spot prices, depending on which specific contracts you are trading.
Futures contracts typically involve expiration and settlement. BTSE sets a predetermined date of expiry for each type of futures product it offers. In the case of BTSE’s Bitcoin futures, the exchange offers perpetual, monthly, and quarterly futures contracts.
If you trade monthly Bitcoin futures on BTSE for example, you essentially are buying and selling Bitcoin based on what you think its spot price will be at the end of the monthly period. If you are long 1,000 BTSE monthly futures contracts (equal to 1 spot BTC) until expiry, you will receive a settlement of 1 BTC after expiry on the settlement date. The same concept is true of BTSE’s quarterly futures contracts. These concepts apply to all futures products BTSE offers.
You can buy or sell these contracts at any point until expiry. If you go long 1,000 BTSE monthly futures contracts (1 BTC) in the middle of the month, while Bitcoin trades at $8,000, and hold until expiry, you will receive 1 BTC after expiry, regardless of Bitcoin’s spot price at expiry.
In contrast, BTSE also offers perpetual Bitcoin futures contracts, which do not expire. They are traded continually with a funding period every eight hours to keep the product’s price close to the price of the underlying spot asset.
Adding futures trading products allows for more options for individuals or entities looking to trade a certain asset or asset class.