What's the Difference Between Spot and Leverage Trading?

Trading crypto can be confusing for beginners. A common question we get is, "spot trading vs. leverage trading—what's the difference?" While both involve buying and selling coins, they have key differences that impact trading outcomes.

Let's take a closer look at the differences between these trading strategies, how they work, and the pros and cons of each. By the end, you'll have a better understanding of which approach is right for you and your financial goals.

What Is Spot Trading?

Spot trading refers to the practice of buying and selling crypto on the spot. You make a trade for the current market price and take ownership of the asset right away.

This approach is the most common form of trading and the one we recommend beginners to start with. You can sign up for a free Coinbase Pro account and start buying cryptos at the current market price. Once the trade executes, you'll own the shares and can hold onto or sell them when the time is right.

Pros and Cons of Spot Trading

The main advantage of spot trading is you have complete control over your trades. When you spot-buy a cryptocurrency, it's yours to hold or sell as you see fit. This is appealing to HODLers or traders who prefer to stay away from the volatility of leverage trading.

Spot trading also carries less risk than leverage. Since you're not borrowing money to trade, you won't have to worry about facing margin calls. This makes spot trading a safer option for risk-averse and new traders.

On the other hand, spot trading may not be as profitable as leverage trading. Since you're only using your capital, you won't have the same buying power as you would with leverage. You may make smaller profits, especially if you're trading with small amounts.

How Does Leverage Trading Differ from Spot?

Leverage trading, also known as margin trading, involves borrowing money from an exchange to buy and sell crypto. When you engage in leverage trading, you can amplify your buying power and trade larger positions than you'd be able to with your capital alone.

For example, if you have $1,000 and your exchange offers a 10x leverage, you can trade up to $10,000 worth of assets. In other words, the exchange lends you $9,000, and you'll only need to put up $1,000 of your money as collateral.

This trading strategy can be a powerful way to increase potential profits. But it doesn't come without consequential risks. If the trade goes south (or you don't know what you're doing), you could see all your money disappear in a snap.

Leverage Trading: Benefits and Drawbacks

If you've been trading for a while and understand how leverage works, you could maximize your profits quicker than through spot trading. With leverage, you can trade larger positions than you would be able to with only your capital.

Another benefit of leverage trading is it allows you to take advantage of small price movements in the market. You can even make profits in a downtrend! This can be appealing for day traders looking to make quick profits from short-term price movements during a bear market.

While leverage trading can bring life-changing rewards, it can also carry a significant risk of major losses. This method is much more complex than spot trading. You must keep track of your collateral, margin requirements, and other factors. New traders may find leverage trading overwhelming, so it's crucial to know the risks and implications before diving into it.

Spot vs. Leverage: How Should I Trade?

The right approach for you depends on your financial goals, risk tolerance, and experience level. If you're looking for a safer option that carries less risk, start with spot trading. It may not be as profitable as leverage trading, but you can compound small profits and hold assets as long as you please. Leverage trading, on the other hand, can lead to higher potential profits. But it's more advanced and carries greater risk.

Start with Spot and Work Your Way Up

At AR Collective, we recommend trading responsibly with spot first. Once you get the hang of buying and selling crypto, you can look into leverage trading. Some exchanges like OKX offer a paper trading feature, where you can dip your toes into this trading method with fake money before getting into the real deal. Join our family in 2023 and learn how to spot and leverage trade effectively!