Spot vs Derivatives in Crypto

The short answer

Buy spot and you own the asset. You can withdraw it, hold it indefinitely, and the worst case is that it goes to zero.

Open a derivative position and you hold a contract whose value tracks the asset. You cannot withdraw anything, the position has a margin requirement, and the worst case arrives well before zero — at liquidation.

These are different instruments. The chart looks the same, which is the source of most of the confusion.

Spot

• You own the asset and can move it to self-custody.
• No liquidation, no funding, no margin call, assuming you did not borrow to buy it.
• Maximum loss is 100% of what you put in, and only if the asset goes to zero.
• Time is not a cost. You can hold indefinitely without paying to do so.
• Custody risk applies — see custody and exchange risk.

Derivatives

A dated future settles on a specific date. A perpetual has no expiry and instead uses a funding mechanism to keep its price tethered to spot. Perpetuals dominate crypto derivatives volume.

What comes with them:

Margin. You post collateral rather than the full notional. This is what enables leverage.

Liquidation. If losses erode your margin below the maintenance requirement, the venue closes your position. This is not an order you placed; it is the venue protecting itself. It happens automatically and it does not consult you.

Funding. On perpetuals, a periodic payment between longs and shorts — typically every eight hours — that pulls the contract price toward spot. Positive funding: longs pay shorts. Negative: the reverse.

The point most people miss

Your stop and your liquidation price are two different levels, and liquidation can be closer.

If you are long with a stop at −8% and your leverage puts liquidation at −5%, you will never reach your stop. You will be liquidated first, at a price you did not choose, with a fee attached, and typically at the worst moment for liquidity.

This inverts the mental model that unleveraged trading builds. In spot, your stop is the floor. With leverage, the floor is whichever comes first — and margin arithmetic, not your plan, decides which.

Before opening any leveraged position: compute the liquidation price, compare it with the stop, and confirm the stop is closer. If it is not, reduce leverage until it is. Leverage, margin and liquidation works through the mechanics.

Funding as a real cost

Funding is quoted per period and looks trivial. It is not, over time.

Illustrative and invented for teaching: a funding rate of 0.01% per 8-hour period is 0.03% per day and roughly 11% annualised, on notional. On a leveraged position, that is charged against a notional several times your capital, so as a percentage of your actual capital the drag is several times larger again.

For a position held hours, funding is noise. For a position held weeks, it can exceed everything else you are paying. This is the main structural reason perpetuals are poorly suited to long-term exposure: you are renting the position, and the rent compounds.

Include it in your cost estimate — the fee calculator has an "other costs" field for exactly this.

Choosing

A rough guide, not a rule:

You want	Usually points to
Long-term exposure, withdrawal, no time cost	Spot
Short-term directional trade with defined risk	Either, spot if unsure
Hedging an existing spot holding	Derivatives
Leverage because the position feels too small	Reduce the position instead

That last row is the one worth pausing on. Wanting leverage because a correctly-sized position feels insignificant is a signal about expectations, not about the instrument. The sizing arithmetic already told you the size. Leverage does not change the risk you should be taking; it changes how quickly being wrong ends the account.