What is Spot trading?
Spot trading is the most common form of trading, especially in crypto assets, and is the most basic form of investment. Spot trading is simply the direct purchase or sale of an asset such as a commodity, stock, bond, or even currency. Crypto spot trading is the same, except it is the direct purchase or sale of a cryptocurrency such as Bitcoin, Ethereum, DOGE, or others.
When spot trading, cryptocurrencies can be exchanged instantly between market participants who are buying and selling them. Just like with any purchase of a physical item, buyers then directly own the crypto they buy from a spot trade. Exchanges that support spot training, like Binance, comprise buyers and sellers who agree on bid-offer prices to facilitate trades.
These trades can happen any time of the day, anywhere in the world, since crypto exchanges operate online. New entrants can buy crypto with fiat currencies on exchanges and can even determine what price they want to enter a position.
What is Margin Trading?
Margin trading is another form of trade that is more similar to performance speculation of an asset. Similar to spot trading, margin trading involves trading an asset such as Bitcoin and hinges on the use of borrowed funds to further capitalize on the future price movements of an underlying asset.
Since margin accounts allow users to borrow funds from a third party, these users have the potential to win or lose much higher amounts of capital through leverage. The borrowed funds are provided by other traders who earn interest based on market demand for margin funds.
To initiate a margin trade, the investor must commit some collateral, which is known as the margin. So if a trader wanted to open a margin trade at a leverage ratio of 10:1 for $10,000, the trader would need to invest $1,000 as collateral.