One decision traders need to make before beginning their trading journey is choosing between Spot Trading and Margin Trading.
In this article, we'll walk you through the benefits and key differences of each.
What is Spot Trading?
Spot trading means buying and selling cryptocurrencies “on the spot” for immediate settlement. Spot helps you manage risk as you can only trade with the capital you have.
Given the nature of spot trading, you need to have the available balance in one currency to exchange for another.
For example, to purchase $1,000 USD worth of BTC with spot trading, you need a balance of $1,000 USD (plus fees) in your account and trade this balance in the BTC-USD pair’s order book when you buy.
Benefits of Spot Trading:
Spot trading allows you to manage risk effectively by trading with the capital you have. You only need the available balance in one currency to exchange for another, making it a straightforward method for trading.
Spot Trading Example:
You have $1,000 USD in your account, and you want to buy BTC. With spot trading, you can directly use your available $1,000 USD balance to purchase BTC.
Spot trading is the default trading mode on Blockchain Exchange when you log in.
What is Margin Trading?
Margin trading allows you to trade in greater size than your account balance by temporarily borrowing from Blockchain.com.
The multiple applied to your account is called leverage. Leverage is measured in multiples. On Blockchain.com, you can trade with 2X, 3X, 4X, or 5X leverage.
Not only can you buy (“go long”) with margin trading to increase your purchasing power, you can also sell (“get short”) a position when you anticipate a decline in an asset’s prices. In the case of shorting, your profit increases as the cryptocurrency decreases in price and vice versa.
Benefits of Margin Trading:
Margin trading provides you with increased purchasing power through leverage, allowing you to trade in larger sizes and potentially increase profits. It also enables you to profit from both rising and falling cryptocurrency prices, giving you more trading opportunities.
Margin Trading Example:
You have $1,000 USD in your account and choose 3X leverage. With margin trading, your trading power becomes $3,000 USD. You can now buy BTC worth $3,000 USD instead of just $1,000 USD.
Margin trading is an optional feature on the Blockchain Exchange and must be activated by toggling to the Margin tab (pictured below).
When considering trading on margin, you should determine how the use of margin fits your own investment philosophy. It is important that you fully understand the risks, rules, and requirements involved in trading digital assets on margin. Margin trading increases your level of market risk. You may lose some or all of the collateral you post in connection with a margin trade. Blockchain.com may initiate the sale of digital assets in your account, without contacting you, to meet a margin call. You are not entitled to an extension of time on a margin call. Further details are set out in the Margin user agreement.