Many newcomers to cryptocurrency trading struggle with key terms like spot trading, contracts, leverage, going long/short, liquidation, and position closing. This guide breaks down these concepts clearly.
Key Crypto Trading Concepts Explained
1. Spot Trading
- Definition: Buying actual cryptocurrency assets and holding them, expecting their value to appreciate over time.
- How it works: Traders purchase coins (e.g., Bitcoin) at current market prices and sell later when prices rise to profit from the difference.
- Example: Buying 1 BTC at $30,000 and selling at $35,000 yields a $5,000 profit.
2. Contracts (Futures)
- Definition: Derivative products that allow speculation on future price movements without owning the underlying asset.
Types:
- Perpetual contracts: No expiry date
- Quarterly contracts: Settle every 3 months
- Key feature: Enable both long (buy) and short (sell) positions
3. Leverage Trading
- Definition: Using borrowed funds to amplify trading positions
Mechanics:
- 10x leverage = $1,000 controls $10,000 position
- 50x leverage = $1,000 controls $50,000 position
- Risk-reward: Higher leverage increases both potential profits and losses
👉 Master leverage trading strategies
4. Going Long (Bullish Position)
- Profit formula: Principal × Price Increase % × Leverage
- Loss formula: Principal × Price Decrease % × Leverage
Example:
- $1,000 at 10x leverage
- 5% price increase → $500 profit
- 5% price decrease → $500 loss
5. Going Short (Bearish Position)
- Profit formula: Principal × Price Decrease % × Leverage
- Loss formula: Principal × Price Increase % × Leverage
Example:
- $1,000 at 10x leverage
- 5% price drop → $500 profit
- 5% price rise → $500 loss
Critical Risk Scenarios
6. Liquidation (Forced Position Closure)
Long position liquidation:
- Occurs when price drops to trigger margin call
- Exchange automatically closes position to prevent further loss
Short position liquidation:
- Occurs when price rises against position
- Exchange buys back asset to limit losses
👉 Avoid liquidation with proper risk management
7. Auto-Deleveraging (ADL)
- Definition: When extreme volatility prevents orderly liquidation
- Consequence: Traders may owe exchange beyond initial margin
8. Position Closing
- Manual closing: Voluntarily exiting trade to lock in profits or limit losses
Types:
- Take-profit: Closes when target profit reached
- Stop-loss: Closes when maximum acceptable loss triggered
Trading Comparison Table
| Feature | Spot Trading | Futures Trading |
|---|---|---|
| Asset Ownership | Yes | No |
| Leverage | 1x | Up to 125x |
| Direction | Long only | Long or Short |
| Settlement | Immediate | Future date |
FAQ Section
Q: What's safer - spot or futures trading?
A: Spot trading carries less risk as you're not using leverage. Futures can amplify both gains and losses.
Q: How do I calculate my liquidation price?
A: Most exchanges provide calculators. Generally: (Entry Price × Maintenance Margin %) ÷ Leverage.
Q: Can I lose more than my initial investment?
A: With spot trading - no. With leveraged futures - yes, through auto-deleveraging scenarios.
Q: What's the difference between cross and isolated margin?
A: Cross uses entire account balance as collateral; isolated limits risk to specific position.