Margin Trading vs. Futures Trading: What is the Difference?

Holding your favorite cryptocurrencies does have its advantages. However, sometimes it gets boring, and then you may wonder if there is something more exciting to do with your crypto wealth. Well, there is. You can use your crypto to trade margins and futures.

These two trading mechanisms will keep you on your toes because they offer a way to make more out of your assets while exposing them to greater risks. But how do they differ, and which one might work better for you? This article presents a detailed comparison of margin trading and futures trading.

What are Margin Trading and Futures Trading?

What is Margin Trading?

Margin trading is a mechanism dating back to the 1920s that allows traders to borrow funds to trade large positions. The amount of money borrowed is expressed in multiples, known as leverages. The higher the leverage, the larger the potential for significant gains. However, while high leverage means a high-profit potential, it significantly increases your assets’ risk exposure.

Check out this introductory article to learn how margin trading works and its pros and cons.

What is Futures Trading?

Futures trading means trading a cryptocurrency (or another financial asset) at a predetermined future price. How does it work? A futures trade usually involves a set expiration date. Traders who trade futures bet the crypto asset will be at a particular price by expiration. When the date comes, and the coin has reached or passed the price, they make a profit. If the reverse is the case, they make a loss.

Let’s illustrate this further with an example. Let’s say Bitcoin is currently $25,000, and Ben buys a $30,000 futures contract to expire by March 1. He is not actually buying the coin at that point but is agreeing to buy one Bitcoin at $30,000 on March 1.

If, by the expiration date, 1 Bitcoin trades at $35,000, he will gain $5,000 since he has already pegged down $30,000 as the purchase price. Conversely, if Bitcoin loses value and dumps to $20,000 by the expiration date, he loses $5,000.

That scenario exemplifies traditional futures contract trading. Another type of futures trading - perpetual futures contract trading - doesn’t involve an expiration date. This article explains what it is and how it works. We also offer a more detailed explanation of futures trading in this guide.

Key Similarities Between Margin and Futures Trading

Use of Leverage

Both margin and futures trading involves leveraging to increase profit potential. Therefore, they offer traders the opportunity to do more with less. However, futures trading usually involves higher leverage ratios than margin trading. On Gate.io, for example, the highest leverage you can trade margin with is 10x leverage, while you can trade futures with up to 100x leverage.

The nature of these two trading mechanisms accounts for their different leverage ratios. Futures trading involves trading standardized contracts that are controlled by the open market and can be bought and sold on exchanges. On the other hand, margin trading involves borrowing funds from the particular broker or exchange you are using. In other words, the exchange in question offers margin trading, while futures trading is more generalized.

Price Speculation

Both futures and margin traders speculate on the prices of crypto assets. This means they bet on whether the prices will go up or down and then position themselves accordingly. If their position turns out to be correct, they stand in line to make significant gains. However, the losses can be substantial if the market turns against them. One advantage of this trading mechanism is that traders do not have to wait for price increases before making gains. They can profit even from price declines if they place their trades well.

Expertise Level

Both margin and futures trading are not recommended for newcomers to the crypto and trading world. This is because of the high level of risk involved and the expertise required to eliminate, or at least reduce, such risks. Traders must thoroughly understand the markets, the crypto asset they’re trading, and the exchange or broker they use. If inexperienced traders try these out without proper guidance, they may suffer immeasurable losses.

Thankfully, Gate.io has a mechanism in place to mitigate this risk. It has a copy-trading feature where beginners can ramp up their portfolio by copying the trades of top, experienced traders. Even at that, the risk is not completely eradicated. So, beginners should still apply caution before venturing into it.

Key Differences Between Margin and Futures Trading

Fees

Margin trading usually comes with higher fees and rates than futures trading. This is because traders borrow funds from the exchange or broker when trading margin. These borrowed funds come with interest, which they will pay when the trade is closed. This interest is in addition to the trading, settlement, and funding fees they still have to pay.

Also, futures contracts are subject to lower tax rates under the US tax code. They also have different tax-reporting requirements under the law. This makes futures trading a more cost-effective option.

Timeframe

Margin trades are usually executed over a short timeframe, usually lasting within a few hours to a few days. But they do not have expiration dates. As long as the trader is prepared to maintain the minimum collateral required for the trade, he can keep trading margin.

On the other hand, futures are usually executed over a longer timeframe, lasting months or even years. But they can expire, and traders must close their positions or roll them over before the expiration date. Not all futures contracts expire, though. Perpetual contracts can go on for as long as the trader wishes.

Risk Management

The different natures of margin and futures trading present different risk exposure levels. For margin trading, the risk majorly lies in the fact that it is not standardized and can therefore behave more erratically than futures trading.

On the other hand, most futures trading contracts usually have clearly defined entry and exit guidelines. This assists traders in properly assessing the risk exposure and deciding if it aligns with their tolerance level. However, the higher-than-usual leverage ratios that usually accompany futures trading mean that traders can quickly lose their capital if the market turns against them.

Margin Trading on Gate.io

There are 470 crypto assets currently tradable on Gate.io’s margin trading feature. These tokens have differing maximum leverage levels. Bitcoin, Ethereum, and other large-cap coins can be traded with up to 10x leverage, while smaller-cap coins have lower leverage ratios (usually 3x or 5x).

You can learn more about how margin trading works in this guide.

Image source: Gate.io

Futures Trading on Gate.io

There are eight leverage ratios on Gate.io futures, the highest being 100x leverage. You can trade two types of futures - USDT-margined and BTC-margined futures. USDT-margined futures are settled in USDT and have about 255 pairs. BTC-margined futures contracts are settled in BTC and have only two pairs. You can find a deeper review of Gate.io futures trading in this article.

Image source: Gate.io

Which Should You Go For?

Both futures and margin trading involve using borrowed funds to maximize your trading power. However, because of the way they operate, they appeal to different types of traders.

Margin trading is more suited for day and swing traders. These traders usually operate on a short-term basis and can use the leverage offered by margin trading to make their gains and get out of the game.

Conversely, futures trading works best for longer-term players who also want to hedge against potential market risks. Because it is also more regulated and standardized, it is a better option for investors who want to trade crypto in a safer and more transparent environment.

You are in the best position to determine which is best for you. Consider what we have discussed here and compare it with your goals, risk tolerance level, and trading style to decide which would work better for you.

Conclusion

Gate.io offers both margin and futures trading in a stable environment. You can be assured of increased gains regardless of which of the two you go for if you play it right. However, don’t let the profit potential blind you to the amplified risks that come with them. Weigh them well and do your research. Your Gate.io account will be waiting for you.