Transaction types explained: spot, options, and more
Cryptocurrency trading can be intimidating for beginners. But, once you understand the different types of trades and how each works, you'll be better equipped to make sounder trading decisions. This article explains the most common transaction types available today.
Spot trading
Spot trading is the most straightforward type of transaction. It involves buying or selling cryptocurrencies without any leverage or borrowing. When you place a spot trade, you're essentially buying or selling the underlying asset. This is the most common type of trade for beginners, as it's simple and easy to understand.
Margin trading
Margin trading involves borrowing funds to increase the size of your position. When you place a margin trade, you're essentially borrowing funds from your chosen exchange to increase your buying power. This can lead to larger potential earnings, but also comes with greater risk of larger potential losses.
Futures
Futures are a type of derivative that allow traders to speculate on the future price of an asset without actually owning the underlying asset. Expiry futures must be settled by a certain date in the future, known as the 'expiry date' — OKX offers weekly, bi-weekly, quarterly, and bi-quarterly time spans for futures.
Perpetual futures are similar to expiry futures, but with two major differences:
Expiry
Where expiry futures have expiry dates set in advance, perpetual futures don’t have expiry dates, which means buyers and sellers can hypothetically keep their positions open 'perpetually' (or, continuously) — as long as their account holds enough margin to cover losses and prevent liquidation.
Funding fees
To avoid perpetual futures diverging significantly from the asset’s spot price, funding fees help discourage major deviations. Importantly, the funding rate is a fee exchanged between the two parties of a contract — the long and short parties — not a fee collected by the exchange.
Options
Options are a type of derivative that gives traders the right (but not the obligation) to buy or sell an underlying asset at a specific price, known as the strike price, on or before a specific date.
Options can be used to protect against price movements, or to speculate on future price movements. They can be bought or sold on an exchange, and the value of the option is determined by a variety of factors, including the price of the underlying asset, the strike price, and the time until expiration.
The final word
Understanding these different types of transactions is crucial for success when trading cryptocurrencies. Spot trading is the most straightforward type of transaction, while margin trading, perpetual futures, expiry futures, and options all involve some level of borrowing or leverage.
Each type of transaction comes with its own set of risks and potential rewards, so it's important to understand which type of transaction is best suited to your trading style and risk tolerance. By using the right combination of transaction types, you can create a trading strategy that fits your goals and helps you achieve success in the world of cryptocurrency trading.
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