Margin Trading Vs. Futures Trading: Which Is Better? - WazirX Blog (2024)

Margin trading in Crypto is different from futures as it lets you control Crypto positions. The question is, do they also share some similarities? Let’s find out in this blog.

So, basically, margin trading uses borrowed funds to buy and sell Crypto. And traders involved in futures trading can post margin as collateral to have large short and long positions on contracts with a pre-defined delivery date.

Crypto investors should know the basic difference between margin trading and futures. Trading margins and futures have some significant differences but also certain similarities. Check them out in the following sections.

What is margin trading?

Margin trading is the practice of placing bets on the crypto market using “leverage,” or borrowed money, and only exposing a portion of your funds. The amount of Crypto required for a leveraged position is known as the margin.

Margin trading positions can be initiated in one of two ways:

• A short position: where you bet that the price will decline.
• A long position: where you bet that the price will go up.

In a long position, you purchase Crypto intending to sell it at a higher price later on and profit from the difference in price. Additionally, this is achievable even without margin. In a short position, you borrow Crypto at its current price with the intention of repurchasing it when the price goes down to gain more profit.

What is futures trading?

Futures are a kind of derivative trading instrument. These are regulated trading contracts between two parties that involve an agreement to buy or sell an underlying asset at a defined price on a specific date.

With futures, investors can protect themselves from unpredictable market conditions and guarantee that they will be able to buy or sell a specific crypto at a given price in the future. However, if the price changes against a trader’s wishes, they may buy Cryptos for more than the market price or sell them at a loss.

Futures trading and margin trading are two strategies that call for solid trading capabilities from the investor as they are advanced trading techniques. They are two different investment types that aim to attain the same goal but do so in multiple ways. In the following section, let’s see whether they have similarities or just differences.

Margin vs. futures trading: Similarities

Opportunity

Futures trading and margin trading are both similar financial instruments. They want to make it possible for investors to purchase more Crypto using just their equity. They both function as speculative instruments and take various approaches to reach the same goal.

Purpose

Both of them have the potential to produce massively increased returns but also extreme losses. It’s surprisingly simple to make substantial, quick gains, especially in the highly unpredictable crypto market. However, significant losses can also happen, so it is advised that only experienced traders use these instruments.

Margin vs. futures trading: Differences

Different markets

The market in which they are traded is the key distinction between margin trading and futures. While futures are contracts traded in the derivatives market and indicate future delivery of the asset, margins are traded on the spot market.

Leverage

When trading Crypto on margin, the typical leverage varies from 5 to 20%; however, when trading futures, the typical leverage often exceeds 100%.

Collateral allocation

Futures simply require a good faith deposit as collateral, whereas Crypto margin accounts allow traders to leverage the spot market through a type of loan on which interest must be paid.

Types of investors

To execute margin trading and futures, they target two different sorts of traders. Futures trading is more relevant to long-term investors than margin trading is to short-term investors.

Final thought: Do they depend on each other?

Futures trading and margin trading are two distinct trading strategies. Both strategies need a high level of expertise in crypto investments. Typically, traders who use margin accounts start their crypto positions with borrowed funds. As a result, your portfolio gives you more capital control, enabling you to take on more risk using leverage. Margin trading increases your potential for both gains and losses, making it riskier than trading without leverage.

In contrast, futures contracts are legally binding contracts where you commit to buy or sell an underlying asset at a future price. You can go long or short on futures based on your directional bet.

The bottom line is that margin is actually required to trade futures. In futures trading, a margin is a deposit made in good faith and used as collateral to open positions. There is nothing to repay since it does not entail borrowing money from a broker. Your maintenance margin, which is the minimal amount of equity required to keep trading, is also represented by the collateral for your futures account.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.