Since its launch in 2017, Binance has become the most popular crypto exchange by trading volume. Part of its appeal is offering innovative products that make trading on Binance exciting and increasingly profitable. Two of these products you’re unlikely to find on other exchanges are crypto futures and margin trading.
Interestingly, these are two of the most traded and in-demand Binance cryptocurrency asset classes. Let’s take a look at both of them and figure out which is truly the better choice to engage in your trading.
Introducing futures and margin trading
Over the decades, different financial products have been launched to provide more opportunities. Although they are common in mainstream financial markets, they are still new in crypto markets.
Futures contracts are derivative products that allow you to speculate on the future price of an asset. Although the trade is meant to be completed in future, the price is agreed upon on the date of the contract. This makes it possible for, say, manufacturers to buy raw materials at a predetermined price in future.
Margin trading is a method of trading financial assets with borrowed money from a third party. Usually, this is the broker through whom you’re gaining access to the financial markets since no single individual can buy assets directly from an exchange such as the NYSE. A portion of the trade value is deposited with the broker to act as the margin or security for the trade.
With this access to an even greater capital and equity base, traders can leverage their positions to increase their performance. The practice is quite popular in traditional trading systems because it allows traders to increase their leverage. Thus, it increases the overall potential to gain more profit from the markets.
How to use these products
While these products are commonplace among seasoned investors, you may want to know how they apply when trading on Binance.
In the cryptocurrency market, it is used for the same function except only for speculation. For example, you can set the price at which you want to buy, say, Bitcoin at a future date. If your predetermined price happens to be lower than the market price on the date the contract is executed, you then make a profit.
When trading on Binance, you will find traditional and perpetual contracts, both of which determine the nature of the contract you have chosen to engage. The traditional futures contract is the same as the one described above and is usually denoted in quarterly periods (3 months ahead). Meanwhile, the perpetual contract doesn’t have an expiration date. Therefore, you can keep the position open in perpetuity until the time you decide to exit.
Binance margin trading
While the funds traded in traditional markets come from investment brokers, the funds traded in Binance margin trading mostly come from other traders. You’re probably thinking, “Why would other traders want to provide funds for other traders to leverage?” Well, the system of operations is relatively simple: those traders that fund margin traders realize that they can get some interest providing funds for other traders hence, it’s a win-win for both parties.
Futures and margin trading on Binance
Advantages of margin trading
Margin trading on Binance provides the same benefit as in traditional financial markets. That means you can opt to open a larger position than your actual would have allowed. It also means you can amplify your expected returns if the trade goes in your favour.
For example, if you have $10,000 and opt for the 20x margin, you can buy $200,000 worth of crypto. If your investment yields a return of $210,000, you get to keep the $10,000 profit even though you only had $10,000 to begin with.
That means faster attainment of profit objectives. Margin trading allows you to hit ordinarily unbelievable targets in your trading. This could have been impossible if you were trading with your minuscule fund.
On the other hand, keep in mind that margin and leverage can also work against you. In the above example, had the value of the investment dropped to $190,000, then you would have lost your entire capital. Remember, it would have otherwise been a 5% decrease in capital had you not used leverage.
Advantages of futures trading
Futures trading on Binance also includes a 20x leverage just like with margin trading. However, the main difference is that you can choose to either buy or sell an asset. This means you can make trades predicting that either the asset will rise or drop in value… something that is not available through margin trading.
For instance, if you believe that the price of Dogecoin will decrease in value, you can place a short order on the coin. If your prediction comes true, you will benefit from the drop. This makes futures trading on Binance an ideal hedging tool because you can trade through all market conditions.
Add to that, futures trading on Binance is charged very low fees. Whether taker or maker fees, you will rarely find another crypto exchange with lower fees. Also remember that for futures contracts, you need only a small margin to initiate the trade so it doesn’t require a lot of capital.
Which is Better: Futures or Margin trading on Binance
Margin trading is perfect for traders that don’t have just enough capital to start up their trading. As we have noted above, leverage can exponentially increase your returns despite having minimal capital. On the other hand, Binance Futures appears to be the better option for long-term traders who are seeking financial security. Hedging can protect you from financial shocks so that your portfolio doesn’t suffer extended drawdown periods.
In your journey to figuring out which is most suitable for you, try to understand that your choice of markets should be based on your equity size, your experience from other traditional trading platforms and the kind of trader you aspire to be.