Spot vs Perps vs Options: A Trader’s Guide to Trading Instruments

So, crypto investment. Sounds pretty simple, right?

You buy crypto, and after a while, you are either at a profit or at a loss. Motivated by the simplicity of it, you log into your preferred crypto exchange, only to notice you have several different options to buy crypto. 

“Should I invest in spot?”, you may ask. “But… What about options trading?” 

“Wait, what the heck do ‘perps’ even mean?!”

Suddenly, crypto investment is not as simple as you thought. That, however, is far from the truth. It’s pretty straightforward once you understand that the difference between spot and perpetual futures is just a matter of how you want to interact with the market.

There is really no reason to pair spot vs perps vs options as if they’re interchangeable or competing against each other. Because they’re not. Spot, perps, and options serve fundamentally different roles in crypto trading, and all they are are different trading instruments, each designed for a specific purpose.

Spot vs Perps vs Options

The difference between them is rather simple to understand. 

First of all, in spot trading, you’re buying the actual crypto. So if you do a spot trading investment to buy 1 $DOGE, congratulations, you now own 1 DOGE forever, unless you sell it. 

In perpetual futures, also known as “perps”, you’re not buying the DOGE. You’re buying a contract that tracks the price of 1 DOGE. 

Finally, in options trading, you’re buying the right to buy or sell 1 DOGE at a specific price by a specific date. It sounds more complicated than it is: you’re basically paying a small fee to bet that 1 DOGE will be worth more later.

Understanding Perpetual Futures

In perpetual futures trading, you’re not buying the crypto, but rather a contract that tracks its price. This contract lets you speculate on whether the price will go up or down, giving you room for profit if you’re correct. 

Perpetual futures contracts don’t have an expiry date, which means you can hold on to your position for as long as you like (but we’ll talk about why that may not be a great idea shortly).

Want a real-life example? You got it. 

Let’s say Bitcoin is trading at $100,000. You open a long perp contract at that price, betting that it will go up. Price goes up $5k, congratulations, you’re now $5k richer (excluding opening and closing fees). But if the price goes down by $5k, your account is now $5k shorter.

We can’t really talk about perps without mentioning leverage. 

Leverage can make or break your account. Trading with leverage basically means trading on borrowed funds. Coinbase or Binance will be happy to lend you a quick buck with leverage, allowing you to turn a $10,000 account into a $100,000 account on a whim (on 10x leverage). 

So in that same example, on 10x leverage on a $100,000 BTC per, you’d only need $10k to trade 1 BTC. If it goes up 5%, your position gains $5k, a 50% return on your margin.

But exchanges are happy to lend you trading funds for your leveraged play. You'd better be sure that they will not hold onto the loan if they see the investment is going south. In that same example, a 9% drop is all it’d need for your position to be wiped out. The exchange collects its fees and leveraged funds while you’re staring at a Bitcoin chart for 27 minutes, wondering what a nice vacation that $10k could have been.

So the bottom line is, perps are the most popular and potentially most profitable trading instrument in the market. But as with anything in crypto investment, managing leverage wisely while using the best possible risk management is still quite important. 

Holding Perps Long-Term: Hidden Risks

What’s the issue with holding perps long term? Without any leverage, there’s no reason not to, right?

Well, wrong. 

Perpetual contracts charge funding fees every few hours, depending on the platform. This happens because this trading investment needs a way to stay in sync with the spot market. Since crypto perps don’t expire like in traditional futures, exchanges use these fees to balance the number of long and short positions.

To understand what funding fees you can be subject to, we’d need to look at funding rates. 

Funding Rates and Liquidation Risk

Funding rates are the percentage used to calculate how much you’ll pay (or earn) in funding fees. They change based on market conditions; if everyone’s long, the rate goes up, and longs pay more. If everyone’s short, shorts pay instead.

If these fees didn’t exist, a larger number of longs against shorts (or vice versa) on a platform like Binance would eventually tip the value of the asset being traded there above its spot price (or below [sorry, I just really want to get this across]). 

To counteract that, positions that are in the majority need to pay a fee, not only tipping the scale back to a more approximate real-life asset price, but also incentivizing traders to bet against the market to potentially earn more.

So, holding onto a perp contract for days, weeks, or months can be a terrible idea. These funding fees, if left unchecked, can quietly eat away at your balance, especially if you’re on the paying side of the funding equation.

To understand what funding fees you can be subject to, we’d need to look at funding rates. 

But funding fees aren’t the only danger lurking in perp land. 

Perps Funding Rate Explained

Funding rates are the secret sauce that keeps perpetual futures tethered to the spot market.

Here’s how it works:

• When the perp price is above the spot price, longs pay shorts (positive funding).
  
  
• When the perp price is below the spot price, shorts pay longs (negative funding).
  
  

This constant exchange incentivizes traders to push prices back in line with the real market. It’s a balancing mechanism — but it can become costly during strong trends when one side dominates.

For instance, during bull markets, funding rates often stay positive for days. That means long traders continuously pay shorts, even if the price keeps climbing.

Spot vs Margin Trading

It goes without saying, but let’s say it anyway. 

Long-term holding on a leveraged perp is also a big no-no. As we mentioned earlier, any given explosive movement can drain your entire account in a matter of minutes. Which means that leaving that position unchecked for more than a couple of hours is generally ill-advised. 

Sure, you could hold on to a leveraged position for months and earn up to 100x on an entire bull market season. That would certainly be really cool, and if you pull it off, you most likely know what you’re doing, cowboy. 

But the safest, and generally most recommended trading instrument for long-term holding will always be spot trading. As we mentioned before, the only risks of trading spots are associated with the price move of the asset. You buy 1 ETH, you own 1 ETH. That’s it. 

Options Mechanics: Time Decay and Volatility

Moving into options, this type of trading instrument is different from the others because they have a time limit. Each time that passes without the trade going your way reduces the value of the contract.

Options Time Decay (Theta)

Think of sports betting, for example. If you bet 50 bucks on Real Madrid to win against Barcelona, and 20 minutes in, Barcelona is already winning two-nil, some betting platforms will allow you to sell your bet early, but for way less than you paid.

Options are pretty similar. The more your trade moves away from your target, the less value it has. This is called time decay, or theta. It’s like your option is melting, slowly losing value every hour it sits there doing nothing.

Options Implied Volatility (IV)

Implied Volatility (IV) represents expected market movement. High IV means traders anticipate big swings, so options gain more value. Low IV means a quieter market and cheaper options.

Traders use IV to gauge when options are overpriced or underpriced. Buying options when IV is low and selling when IV is high can be a profitable strategy, if timed right.

When to Use Calls or Puts

When you trade options, you’ll hear about calls and puts. To put it simply:

• Calls = bullish bets (you expect prices to rise)
  
  
• Puts = bearish bets (you expect prices to fall)

The question “when to use calls or puts” is rather obvious, but coming up with a winning strategy requires meticulous understanding of market behavior. If your analysis points to upward momentum, you’d go for a call. If it’s the other way around, you’d go for a put.

Hedging Strategies

The fun thing about hedging strategies is that you’re guaranteed to win. The sad part is that you’re guaranteed to lose. In essence, hedging is a trading strategy that involves making a trade you believe will be successful, while also placing a smaller bet directly against that very same trade.

Options vs Futures for Hedging

Both options and futures (perps) can help you hedge.  But they work in different ways. 

Option Hedging: 

Options give you flexibility. A common strategy is the protective put:

You’re long on an asset (spot or perp). You buy a put option with a strike price below your entry.

If the asset dumps, the put gains value and offsets your loss.

If the asset pumps, you ignore the put and ride the profit. You’re protected on the downside, but still free to catch the upside.

Futures (or Perps):

Futures are more direct:

You’re long on spot. You open a short perp to hedge.

If the asset dumps, your short gains and balances the loss.

If the asset pumps, your short loses, so you give up some upside. This strategy offers stronger protection, but you’re exposed to full downside on the hedge itself. You have to manage it actively.

Beginner-Friendly Instruments

If you’re new to trading, the best course of action is likely to take it slow. Mess around with some spot trading, analyze the market, DYOR, and actually own a currency for a while. If anything, it’s a great first step into cryptocurrency trading.

Make no mistake, spot trading is not reserved only for beginners. Many professional traders use it. But ultimately, it’s the simplest and easiest way to start dabbling with digital asset investments. 

Once you get a grip of how things work, you can start exploring more advanced tools like futures and options. Perps are a bit easier to understand, but options can be more dynamic. Both have their use nonetheless, so it’s always a great idea to learn all forms of trading instruments.

Fees Comparison: Spot vs Perps vs Options

Spot trading is not only the easiest to grasp, but also the cheapest. Since all you’re doing is buying a currency, you only pay a small fee when buying and selling the asset. 

Perpetual contracts (perps) often come with funding rates, which are recurring fees paid between long and short traders depending on market conditions.

Options tend to have higher upfront costs because you pay a premium to open the trade, and depending on the platform, there might be additional fees for exercising or settling the contract.

So if you’re looking for a place to start trading, why not take a look at Blofin? New users get to enjoy a 10% deposit bonus, as well as exclusive community rewards. 

Frequently Asked Questions

1. What is the difference between spot, perpetual futures, and options? 

Spot means you own the actual asset. Perps let you trade price movements without owning them. Options give you the right to buy or sell at a set price by a set date.

2. Which is better for beginners: spot, perps, or options? 

Spot is best for beginners. It’s simple, low-risk, and helps you learn market behavior. Perps and options require more strategy and risk management.

3. What are the main risks of trading perps? 

Liquidation risk and funding fees. Leverage can wipe your account fast, and holding perps long-term can drain your balance through recurring fees.

4. Do options expire, and how does time decay (theta) work? 

Yes, options expire. Time decay means your option loses value as expiration approaches, especially if the market doesn’t move in your favor.

5. How do I choose between spot, perps, and options for hedging? 

Use options for flexible, limited-risk hedging. Use perps for stronger protection but with full exposure. Spot alone isn’t a hedge, it’s the position you’re protecting.