The debate as to whether cryptocurrency is a security or a commodity still rages on. In the meantime, however, crypto can be bought and sold in various ways.
Spot Market: Simply buying or selling at market price. This can be accomplished whenever and wherever you want through a digital asset exchange.
However, you can also purchase or sell derivatives of certain digital currencies. These are financial contracts that relate to the underlying commodity/security – they are referred to as futures or options. Rather than trading and holding the actual asset, these contracts are fulfilled if certain events happen.
Futures: financial instruments that represent claims to buy or sell an asset in the future at a predetermined price. Example: I agree to buy bitcoin for $22,000 next June, no matter what the price is today.
Options: similar to futures but they provide the option, and not the obligation to buy the asset in the future. Example: You agree to sell me your bitcoin for $22,000 next June if I want it at that time, but I don’t have to.
Options and futures contracts represent bets on the future price of an asset, but so does spot trading (buy low/sell high). So. why bother with derivatives trading? It’s all about Leverage.
Futures and Options allow you to buy more crypto with your capital than a simple spot trade. When you lock in a price to buy, say a bitcoin in six months, they only have to invest a fraction of the price of that bitcoin. The contracts also allow investors to manage their risk, known as hedging. For example, a farmer can sell crops before they are even planted through wheat futures.
On the buy side of a contract, the buyer gets to lock in what he hopes will be a lower price than market rates in the future, but can use that capital to invest however they want. It’s the same with cryptocurrencies – until the contract matures, a trader can do what she likes with the rest of her money – it isn’t locked up in the trade.
There are many derivative contracts in conventional finance, such as banker’s acceptances, forwards, swaps, etc. each one providing leverage in a slightly different way.
You can trade bitcoin on a regular exchange like Schwab (which is not a crypto exchange) but only through futures or options. There are also crypto exchange-traded funds (EFTs) available which trade like any stock on a regular equity exchange. With EFTs, investors purchase shares in the fund which then makes investments in crypto futures or crypto-related companies on their behalf. Note: there is no spot crypto EFT as these are not allowed by the Securities and Exchange Commission under the premise that bitcoin (or any other crypto) is inherently too volatile and manipulative.
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