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Is doing contracts the same as using leverage? Which is better, doing contracts or using leverage?

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Leverage trading has become a popular investment method, allowing investors to amplify their potential returns through borrowing, but it also increases risk. While both leverage trading and contract trading involve using leverage, they are fundamentally different. Contract trading focuses on predicting future asset prices and involves standardized agreements, while leverage trading allows investors to control larger positions with smaller amounts of capital. In the cryptocurrency market, leverage trading uses personal funds as collateral to borrow assets, enabling larger investments but with higher risks. Contract trading, on the other hand, involves futures contracts and is distinct from spot trading. There are two main types of contracts: delivery contracts, which settle at specified intervals, and perpetual contracts, which have no settlement date. Leverage trading supports a wider variety of cryptocurrencies compared to contract trading, which typically only includes major and popular coins. Additionally, leverage ratios in contract trading can be significantly higher than in leverage trading, which usually ranges from 1 to 10 times. Both trading methods allow for long and short positions, but the processes differ slightly. Choosing between contract and leverage trading depends on individual investment goals, risk tolerance, and experience. Each has its advantages and risks, with contract trading offering clearer risk assessment and potentially lower fees, while leverage trading provides the ability to capitalize on short-term market movements. Investors should be aware of the risks associated with leverage trading and implement appropriate risk management strategies.

The number of trading methods available for investors is increasing, with leveraged trading being one of the most popular. It amplifies the investor's own investment returns through borrowing, but it also increases investment risks. However, during actual operations, questions may arise: is contract trading the same as leveraged trading in terms of risk amplification? The answer is no; contract trading emphasizes predicting and delivering the future price of the underlying asset, while leveraged trading focuses on amplifying trading positions through borrowing to increase the potential scale of profits or losses. Below, I will explain in detail.

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Is contract trading the same as leveraged trading?
Contract trading and leveraged trading are not the same. Although both involve the use of leverage, their meanings differ. The essence of contract trading is an agreement where the buyer agrees to receive an asset at a specific price after a certain period, and the seller agrees to deliver the asset at that price after the same period. Leveraged trading, on the other hand, is an investment that uses a small amount of capital to achieve returns several times the original amount.

In the cryptocurrency market, leveraged trading refers to investors using their own funds as collateral to borrow coins from the platform, thereby amplifying their original capital several times to make larger trading investments, thus achieving significant returns with a small amount of capital, but also taking on higher risks. Leveraged trading is an extension of spot trading and exists within the spot market.

Contract trading, also known as futures trading, differs from spot trading in that it involves buying and selling standardized forward contracts for commodities or financial assets. According to this forward contract, the buyer will purchase a certain asset at an agreed price after a specified time, while the seller must deliver the asset at that agreed price after the specified time. In the cryptocurrency market, it is an independent product within the derivatives trading market.

In the cryptocurrency contract market, product types are mainly divided into delivery contracts and perpetual contracts. Delivery contracts are generally settled on a weekly/monthly or quarterly basis, while perpetual contracts have no delivery date and are never settled.

As mentioned above, leverage exists in the spot market, so there are relatively more cryptocurrencies that leveraged trading can support. In contrast, contract trading as an independent derivative usually only supports mainstream coins and some popular coins, with the specific types determined by the platform.

Although both aim for significant returns with a small investment, most leveraged trading platforms can offer lower leverage multiples than contract products, typically in the range of 1-10, while contract trading can generally reach multiples of 20, 50, and 100, and some platforms can provide leverage multiples of up to a thousand for specific coins.

Additionally, the fee calculations for both differ. Leveraged trading is spot trading, so it incurs corresponding spot trading fees. Due to the borrowing relationship, users also need to pay corresponding interest fees, which start accruing when assets are borrowed, generally charged daily. Even if no positions are opened after borrowing, interest fees still apply. Contract trading typically incurs fees only at the time of delivery, and specific fees vary by platform but are usually lower than spot rates.

Both can be operated in both directions, meaning one can go long or short on a certain coin. In contract trading, one only needs to choose the long or short direction when opening a position, while the process for leveraged trading is slightly more complex. For example, in BTC/USDT leveraged trading, if going long, one needs to borrow USDT, and if going short, one needs to borrow BTC.

Which is better, contract trading or leveraged trading?
Both contract trading and leveraged trading have their advantages and risks. The choice between contract trading and leveraged trading depends on individual investment goals, risk tolerance, and trading experience. Here are some pros and cons to consider when choosing which method to use:

Contract Trading

  1. Clear Risks: Futures contracts have clear expiration dates and prices, allowing investors to better understand their risks and returns.

  2. Long-term Investment: Contract trading is more suitable for long-term investors who have confidence in the fundamentals and future trends of the asset.

  3. Futures Price Volatility: The futures market may be affected by price fluctuations, market sentiment, and other factors, leading to potential losses.

  4. Leverage Limitations: Compared to some leveraged trading, the leverage ratio in futures trading may be lower.

Leveraged Trading

  1. Amplified Leverage: Leveraged trading allows investors to control larger positions with relatively small capital, thus amplifying potential profits and losses.

  2. Short-term Trading: Suitable for short-term traders who can quickly capitalize on market fluctuations for profit.

  3. Potential Losses: Leveraged trading amplifies potential losses, so investors may face higher risks.

  4. Market Volatility: Higher leverage means being more susceptible to market fluctuations, which can lead to rapid account losses.

The above content answers the question of whether contract trading and leveraged trading are the same. Although in practice, some platforms combine these two concepts to offer leveraged contract trading, allowing investors to borrow to amplify their futures positions, there are still some differences. The main advantage of leverage is that it supports more cryptocurrencies, making it more suitable for users with multi-coin needs. The advantage of contracts is that they support higher leverage multiples and do not incur borrowing interest, making them suitable for users who prefer high leverage or low leverage for long-term holdings. In summary, investors need to pay special attention to the risks associated with leveraged trading and take appropriate risk management measures when engaging in such trading.

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