Crypto Spot trading occurs in both traditional and crypto markets, with the sole aim of profit making. Read this guide to understand crypto spot trading, and explore why it is beneficial for crypto investors.
What is Crypto Spot Trading?
Crypto spot trading, often known as a spot transaction, is a type of cryptocurrency trading. It is the practice of purchasing and selling cryptocurrencies at real-time rates in order to make a profit.
Most spot transactions entail actual delivery of the commodity, money, or instrument; the difference in price between a future or forward contract and a spot contract accounts for the time value of the payment, which is dependent on interest rates and the time to maturity.
The spot exchange rate is used in a foreign currency spot deal to refer to the exchange rate on which the transaction is based. A forward or futures transaction may be compared with a spot transaction.
Unlike investing in cryptocurrency, which usually entails keeping (or “HODLing”) a crypto asset for the medium or long term, spot traders purchase and sell a variety of cryptocurrencies on a daily basis in the hopes of making consistent short-term gains.
One unique feature of crypto spot trading is that it enables you to keep ownership of the cryptocurrencies you acquire while giving up ownership of the cryptocurrencies you sell.
Understanding Crypto Spot Trading
Spot traders participate in the market with the intention of making a profit by buying assets with the expectation that the assets’ values would increase. They will be in a position to make a profit by selling their assets on the spot market later on when the price has increased.
Spot traders also have the option of shorting the market. The sale of financial assets and subsequent buying of more assets as their prices fall constitutes this process.
The price that is being paid for an asset on the spot market is referred to as the “spot price.” By placing a market order on an exchange, you will have the ability to buy or sell your assets quickly at the best price that is currently available. Having said that, there is no assurance that the current market price will remain stable while your order is being carried out.
For example, suppose you buy gold at a spot price in the hopes of seeing it climb in the future months. Now, if the gold price rises in the next months, you will benefit handsomely; if it falls, you will lose money.
When an investor (Mr. X) wishes to acquire 1,000 BTC on the crypto spot market, he’ll buy the coin at the current market price, and you’ll either keep it for a few months or sell it for a profit or a loss.
There is also a possibility that there is not enough inventory to fulfill your request at the desired price. For instance, if you place an order for 10 ETH at the spot price but there are only 3 available, you will need to fill the balance of your order with ETH purchased at a different price in order to fulfill it.
Prices for spot trades are updated in real time and continue to fluctuate when orders are filled. Different rules apply to spot trading conducted over the counter. You are able to negotiate a defined amount and price directly with a third party even if there is no order book involved.
Delivery may be immediate or normally occur within T+2 days, however it all depends on the asset. The trading date plus two business days is denoted by the notation T+2. Historically, the transfer of shares and other forms of equity required the actual presentation of certificates.
Benefits of Crypto Spot Trading
Both sellers and buyers gain from cryptocurrency spot trading. Here’s a quick look at some of them:
- Spot trading is transparent because it involves transactions that happen instantly.
- There is no trouble getting into a spot market. Price changes can also be used to the advantage of traders with small amounts of money.
- Spot trading gives you a better chance of making money than other types of trading. It lets people buy and sell coins at the same time.
- A spot market makes day trading possible, which means you can quickly buy and sell crypto tokens to make small profits.
- In a spot market, it’s easy to trade crypto tokens with each other and with fiat money, so traders can make transactions right away.
- Spot trading gives you the chance to negotiate. Both buyers and sellers can agree on prices that are good for them. This method of negotiating gives both parties a fair and equal advantage, which makes it one of the best markets for trading cryptocurrencies.
- Spot trading is one of the most profitable ways to trade because it lets you buy tokens at low prices and sell them at higher prices, creating a balanced way to make money.
Risks Involved in Crypto Spot Trading
There are risks and drawbacks to crypto spot trading. We’ve highlighted the most essential ones for you below.
- A substantial percentage of the global crypto spot market is unregulated.
- Spot trading does not offer the same level of flexibility as CFD or futures trading.
- When compared to CFD or margin trading, the potential gains in the spot market are less.
Where to Trade Crypto Spot Market
Crypto spot markets are available on the following platform;
- Peer-to-peer
- Centralized exchanges
- Over the counter
- Decentralized exchanges
Peer-to-Peer
Peer-to-peer trading enables traders to exchange cryptocurrencies with one another. Peer-to-peer trading, like OTC, can be conducted without the participation of third parties or middlemen.
A peer-to-peer service is a platform that links participants to a transaction directly without the need of a third-party middleman.
Peer-to-peer services use technology to reduce the transaction costs of trust, enforcement, and information asymmetries, which were previously addressed by relying on trusted third parties.
Peer-to-peer platforms provide its customers with services such as payment processing, buyer and seller information, and quality assurance
While P2P has many advantages, the trading environment can be dangerous without third parties arranging deals between traders through escrow services. P2P trading can also be hampered by a lack of liquidity and a lengthy settlement period.
Centralized Exchanges
Compared with the traditional stock exchanges and online brokerages, centralized exchanges use the order book mechanism to connect buyers and sellers for large-scale bitcoin transactions.
CEXs are often more secure and user-friendly than their decentralized equivalents, albeit charging higher fees.
In essence, exchanges are markets. They are beneficial when a huge number of individuals are attempting to purchase and sell the same sort of item concurrently. Famous exchanges in the conventional economy include the New York Stock Exchange and the London Metal Exchange.
In the cryptocurrency industry, prominent CEXs include Binance, Coinbase, Gemini, and Kraken.
By “clearing” deals, centralized crypto exchanges directly engage in markets. Typically, they maintain digital order books, which are listings of open buy and sell orders that include quantities and prices. They link buyers and sellers and publish current market values based on the most recent selling price of an asset.
Over the Counter (OTC)
Over the Counter (OTC) spot trading occurs outside of crypto exchanges between two parties. By offering varying rates at which they will buy/sell a cryptocurrency, dealers and brokers serve as market makers. OTC trading is frequently less expensive than exchange trading, and the trade price is not always revealed to third parties.
Not having to utilize an order book is advantageous for OTC transactions. When trading low-liquidity assets, like as small-cap coins, a big order might result in slippage.
As a result, the exchange cannot completely fill your purchase at the desired price, therefore you must accept higher pricing to fulfill the order. Large over-the-counter transactions generally receive better prices as a result.
Even liquid assets such as Bitcoin might experience slippage if orders are too large. Therefore, even huge BTC orders can benefit from OTC trading.
Typically, OTC spot markets are private and less regulated than exchange markets. Moreover, they let traders to purchase and sell bigger amounts of cryptocurrency without significantly affecting the market price.
Decentralized Exchanges
Decentralized crypto exchanges, often known as DEXs, are applications built on blockchain technology that facilitate the trade of digital assets on a massive scale between several users.
Instead of using the traditional strategy of acting as a financial mediator between buyers and sellers, they accomplish this goal only via the use of algorithmic processes.
Examples of smart contracts include the algorithms that are utilized by DEXs. They are snippets of code that are built on top of blockchain networks like Ethereum, and they are what cause various outputs to be triggered when specific inputs are provided.
Nevertheless, DEXs utilize blockchain technology in order to match buying and selling orders. Most of the time, DEX users don’t have to make an account and can trade directly with each other without having to move assets onto the DEX.
The majority of the time, users of the DEX are not required to sign up for an account and are able to engage in direct commerce with one another without the prerequisite step of moving assets onto the DEX.
Through the use of smart contracts, trading takes place straight from the wallets of the traders. On a blockchain, they are autonomously running bits of computer code.
The experience of using a DEX, which offers consumers greater flexibility and privacy than that of a conventional exchange, is the preference of a significant number of users. Having said that, there is a cost associated with this. For instance, if you run into troubles, the absence of know-your-customer checks and customer assistance can be a concern for you.
Binance DEX is one example of a DEX that utilizes an order book concept. The Automated Market Maker (AMM) concept, which is used by companies such as Pancake Swap and Uniswap, is a more recent innovation.
AMMs employ smart contracts similarly to other cryptocurrencies, however they use a distinct pricing strategy. To trade their tokens, purchasers make use of the funds in a liquidity pool. Everyone who utilizes the pool is responsible for paying transaction fees to the liquidity providers that provide the funds for the pool.
Conclusion
There are several advantages to using a cryptocurrency spot market. Crypto spot trading on spot markets is a popular option for people to trade, especially for those who are just getting started.
If you’re considering it, you should proceed with caution and only trade with money you can afford to lose. There are other advantages to selecting a reputable exchange that provides the highest liquidity and security.
Even though it’s simple, it’s always a good idea to learn more about its advantages, disadvantages, and viable tactics. Aside from the fundamentals, you should consider expanding your expertise to include technical, fundamental, and sentiment analysis.
