ELI5:50 Explaining crypto liquidations – The world of spot and futures crypto purchases

Days like today often flash headlines of massive liquidations, while the terms ‘spot’ and ‘futures’ mystify many. Let’s break down these complex terms and their significance in the crypto market.

ELI5 (Explain Like I’m 5)

Suppose you’re at a school fair. You see a toy you want, but you only have enough tickets to buy it now (that’s spot buying). But your friend tells you he will give you the toy next week, and you can pay him the same number of tickets then (that’s a futures contract). You’re lucky if the toy becomes popular and needs more tickets next week! But you’re not so lucky if the toy gets less popular and needs fewer tickets. Now, imagine the principal says no toys can be bought or sold anymore (that’s liquidation).

ELI50 (Explain Like I’m 50)

Spot buying is like purchasing a house outright – you pay the current price, and the house is yours. Standard Futures are similar to buying a home on a contract; you agree to purchase at a future date for the current price despite fluctuations. If housing rules change and property sales are banned, that’s akin to a market liquidation event.

Perpetual futures are akin to a lease-to-own agreement for a property. You agree to make regular payments for the property, with the price adjusted based on current market values. This payment process continues indefinitely until you or the seller decide to terminate the contract, mimicking how perpetual futures work in crypto.

Spot vs. Futures crypto purchases

In the detailed context, Spot, and futures crypto purchases form the backbone of crypto trading. Spot trading is the straightforward purchase or sale of a cryptocurrency, instantly executed at the ‘spot’ or current market price. It provides immediate ownership and is typically less risky.

On the contrary, futures trading is a contractual agreement to buy or sell a particular cryptocurrency at a predetermined price at a specific future date, or in the case of perpetual futures, at any date in the future. This speculative nature of futures trading can yield high profits but also comes with significant risks, particularly in the volatile crypto market.

Perpetual futures contracts are a variant of the standard futures contracts. Unlike traditional futures with an expiry date, perpetual futures are designed to trade close to the spot price of the underlying asset and do not have an expiration date. They allow traders to hold positions as long as they want, making them attractive to long-term…