Spot or Futures Trading? Exploring the Timeless Debate in the Crypto Market
The debate between spot and futures trading highlights two distinct approaches in the cryptocurrency market. Spot trading focuses on long-term ownership and value creation, while futures trading capitalises on market volatility and short-term speculation.
Want to know which approach is most effective? Read our article to discover their impact on the crypto market.
HODL as a Philosophy
The cryptocurrency market has introduced a revolutionary class of assets capable of transforming the world. It has also democratised access to advanced trading tools, with options, futures, and other derivatives becoming the most widely used.
According to IntoTheBlock, the total trading volume of Bitcoin futures in December 2024 reached nearly $1.8 trillion, surpassing the $1.7 trillion transaction value recorded on Bitcoin’s blockchain in the same period. Spot trading volumes, by comparison, are six to seven times smaller than futures trading, emphasising the dominance of speculative activity over actual use.
The Liquidity of Bitcoin
Only about 20% of Bitcoin is actively circulating in the market, which creates a limited liquidity multiplier of roughly 1 to 5, a figure that continues to decline over time. This means that a small fraction of traded Bitcoin provides liquidity for the entire market.
The growing trend in the futures market has been evident since 2019 despite a temporary decline following the collapse of FTX in 2022. Interestingly, this trend coincides with the rising popularity of the HODL philosophy, which advocates for long-term holding over speculative trading.
HODL vs. Derivatives Market
HODL, or “Buy and Hold,” is more than just a strategy — it has evolved into a philosophy many crypto investors embrace. It avoids speculating on short-term market volatility, which has increasingly fueled the derivatives market.
The core of HODL is simple: purchase physical Bitcoin (spot) and store it securely on a personal cold wallet for the long term. However, not everyone follows this approach, as evidenced by the immense trading volumes in the derivatives market.
The Evolution of Futures Trading
Initially, futures contracts were designed as agreements for delivering goods at a predetermined price on a set date. For example, farmers could lock in the cost of a ton of grain for the fall during the spring.
In the modern crypto market, futures have transformed into tools for leveraged trading, enabling users to amplify their gains by turning $10 into thousands with just a few clicks. However, the risks are equally high, as demonstrated by $1.01 billion in liquidated positions on December 19, 2024, including $844 million in long positions.
Leveraged Trading and Its Risks
The lack of recent data on average leverage levels in crypto trading makes it difficult to analyse trends comprehensively, though historical data from BitMEX in 2018–2019 shows leverage levels between 20x and 30x. This is significant given that spot and futures trading volumes were roughly equal.
With its high volatility and liquidity, Bitcoin saw leverage rates of up to 50x during this period. Today, some meme tokens on platforms like Binance offer leverage as high as 50x or even 75x, further amplifying potential risks and rewards.
Spot Trading vs. Futures: A Clash of Investment Philosophies
The debate between spot and futures trading revolves around the fundamental difference between investing and speculation. Market participants who focus on long-term value creation typically avoid leveraging their trades. They do not need short positions or derivatives, as their approach is rooted in building sustainable investments.
On the other hand, futures traders are primarily driven by price movement and volatility, seeking to profit from short-term market fluctuations. This creates two distinct profiles: conservative investors who value direct ownership and speculative traders who embrace modern trends like the sharing economy, where ownership is temporary and focused solely on immediate gains.
Conclusion
The ongoing debate between spot and futures trading highlights the diverse strategies in the cryptocurrency market. While spot trading emphasises long-term value and ownership, futures trading thrives on volatility and speculation. Both approaches play crucial roles, and understanding their dynamics is essential for navigating the crypto space and aligning with your investment goals.
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