What is the difference between spot trading and futures trading?

Spot trading and futures trading are two different types of trading methods commonly used in cryptocurrency and financial markets.

Spot trading involves buying or selling an asset immediately at its current market price. The transaction is settled "on the spot," meaning the exchange of the asset and payment happens instantly or within a short period (usually within two days). In spot trading, you become the owner of the asset immediately after the transaction is completed. There is generally no leverage involved, meaning you trade using only the funds you have. This type of trading is simpler, more straightforward, and typically involves lower risks, as you're trading based on the current price of the asset.

On the other hand, futures trading involves trading contracts that represent an underlying asset. These contracts allow you to buy or sell an asset at a predetermined price at a set date in the future. In futures trading, you don’t need to own the asset immediately. Instead, you're speculating on its future price movements. Futures contracts are settled at a later date, and the settlement might involve either cash or physical delivery depending on the contract terms. Futures trading allows the use of leverage, meaning you can control a larger position with a smaller capital investment, which increases both the potential for profits and the risks. Futures trading is considered more complex and riskier than spot trading, as it requires predicting future price movements, and you can experience significant gains or losses.

In short, spot trading involves immediate ownership of assets without leverage and generally lower risk, while futures trading involves speculating on future prices with leverage and higher risk.