Crypto trading for dummies: what is spot, contracts and liquidation

Many newcomers get confused with the terminology of crypto trading. Let's break it down simply.

Spot vs Contracts: what is the difference?

Spot is the simplest: you buy cryptocurrency and wait for it to increase in value. Bought BTC for 40k, waited for 45k — sold, made a profit from the difference. No frills.

Contracts are more complex. Here you can trade futures. Think the price will soar? Open a long ( and bet on growth ). Think it will drop? Open a short ( and bet on decline ). With contracts, you can earn on both price increases and decreases.

Leverage: double your profit or go bankrupt

Here your profits multiply. If you open a position with a 10x leverage:

• 1% price increase = 10% profit
• 1% drop = 10% loss

Sounds tempting? But the risk increases proportionally. High leverage = high profit, but also high risk.

Liquidation: How to Lose Everything

Example of a long position with 10x leverage:

• Your margin ( deposit ): 10,000 U
• You borrow: 90,000 U
• Trading together: 100,000 U

If the price drops by 10%, you will lose the entire deposit (10 000 U), and the exchange will forcibly close the position. This is liquidation. The account balance is zero.

Example of a short position with 10x leverage:

• Margin: 10,000 U
• You borrow coins worth 90,000 U and sell them.
• Total money from sales: 100,000 U

If the price rises by 11%, then 100,000 U will no longer be enough to buy these coins back. The exchange forcibly closes the position. Again, a loss.

Bankruptcy: when liquidation does not keep up

Sometimes the market moves too quickly. The position cannot be closed at the liquidation price, and you can no longer return the borrowed funds. Then you not only lose your deposit, but also end up having a debt to the exchange.

Exit: closing the position

The main strategy for a beginner: manually close the position when the price has turned in your favor. Lock in the profit, close the position, collect the money — the basic scheme.

Conclusion: spot trading is for those who want to sleep peacefully. Margin contracts are for those who are ready to take risks.