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Spot transaction and Contract transaction

Spot trading is a regular trading mode of cryptocurrency exchanges including OCT(over-the-counter trading). You pay the corresponding fiat currency price or cryptocurrency for the currency that you want to purchase, and trade directly.   

The principle of contract trading is similar to traditional futures trading, but the different between contract trading and futures trading is that you can use leverage and margin to make larger profits in contract trading. It makes cryptos trading have various option. You can not only buy long but also short selling. However, the potential for loss is also greater at the same time. In addition, different leverage will correspond to different risks. The higher the leverage, the lower the percentage of price change will lead to the position liquidation. 

What is Leverage trading, Long, Short, and Liquidation?

Long: The expectation that the cryptocurrencies will rise in value in the future.

Short: Believing the price of cryptocurrencies will decrease in value. Investors borrow the crypto from a broker. If the price goes down, you can buy the crypto at the lower price and return it to the broker. If the price of the crypto rises and you buy it back later at the higher price, you will incur a loss. Short selling is for the experienced investor.

Leverage trading: It’s also called margin trading. Leverage is essentially borrowed funds that increase a trader’s position size and its market exposure, thus its profitability. Leverage refers to how much the position was increased by. Leverage trading can be used to open both long and short positions and put in a percentage of the total order value. Traders use margin to create leverage. Leverage lets you increased buying power by allowing you to open larger positions. 

Liquidation: Liquidation is the process to settle the contract value and the exchange will calculate everything for you. 

For instance:

Suppose I have 1 BTC inside my available balance today, and then the price of Bitcoin has risen by 10%. The difference between spot trading and contract trading will be the following. 

Spot trading: What I will get is one Bitcoin multiply by 10%. The number of Bitcoin remains unchanged, one Bitcoin, but the value has increased by 0.1 Bitcoin. This is the profit from spot trading. 

Contract trading: Suppose I have 1 BTC inside my available balance and use 100 times leverage to enter a 100 BTCs long position. The price of BTC has risen by 10%. The profit is 10 BTCs plus the profit I earn from the spot. The deposit, one BTC will be returned and the profit 10 BTCs from contract trading. One plus ten equals eleven BTCs. In addition, the price of BTC has risen by 10% so the the value has increased to 12 BTCs.