If you want to find out what spot trading in crypto is and how it works, you’ve come to the right place. In this guide, you’ll learn how spot trading works and how it differs from margin and futures trading. In addition to that, you’ll find out what are the main benefits and risks of spot trade and how to make money using this technique.
What Is Spot Trading in Crypto?
Spot trading crypto refers to buying crypto coins and tokens at the price they currently have on the market and selling them at a higher price to make a profit. All transactions take place “on the spot”, hence the term.
Unlike other trading techniques, spot trading is about taking ownership of cryptocurrencies. This means that you won’t be forced to sell your coins. Instead, you’ll get to HODL them for as long as you want. The goal of crypto spot trading is to generate short-term profits. This makes it ideal for beginners.
Spot trading includes three concepts — spot price, trade date, and settlement date. Spot price refers to the current price of a certain cryptocurrency on the crypto market, at which it can be bought immediately.
The trade date indicates the date when the transaction was executed, while the settlement refers to the date when the transaction was settled.
How Does Spot Trading Work?
Spot transactions take place on the spot market. A spot trading platform comprises buyers, sellers, and order books. Buyers set bid prices — the highest price they are willing to pay to buy a certain digital asset.
The seller will, on the other hand, provide ask prices — the lowest price at which they are ready to sell their cryptocurrencies. Order books are used for recording both bids and asks.
To make spot market transactions, traders must choose leading crypto exchanges that allow spot trading. The best spot market examples include Binance and Kraken. Then, they’ll have to create and verify their account by providing KYC documents. After that, they’ll be able to make a deposit using fiat or other cryptocurrencies.
The second step is choosing a cryptocurrency pair for trading and placing a buy or sell order. Traders will also be able to place limit orders. Limit orders allow setting a particular buy or sale price.
That said, spot traders will have to buy digital assets using their own money. Because of this, spot trading is generally considered safer than other trading techniques, since traders will invest only what they can afford to lose.
As already mentioned, all transactions take place on the spot, immediately after the order book is filled. This means that traders will be able to withdraw their funds as soon as the trade is executed.
Spot trading can be done through centralized exchanges and decentralized exchanges, as well as OTC, and P2P trade dealers. The trading method will depend on the platform. On that note, CEXs will use order books while DEXs will use smart contracts and AMMs.
Keep in mind that spot markets will be subject to large variations in prices. They’ll also be affected by the crypto fear and greed index — the sentiments of buyers and sellers. Furthermore, exchange rates will be based on market demand and the current supply of digital assets.
Benefits of Spot Trading
Now that you know how to trade crypto on spot markets and what lies behind spot market meaning and terminology, let’s find out what makes it beneficial.
Simple to Navigate
Spot trading is simple. Traders have to buy the desired crypto token or coin at a low market price and wait for the right moment to sell them at a higher price.
This makes spot trading suitable for beginners. In addition, spot prices are straightforward since they’re based on demand and total supply.
Although every trading involves certain risks, spot trading is less risky than other types of trading. Why? Because it only involves buying and selling cryptocurrencies at their market price.
This means that users will be able to sell their coins whenever they see fit. Moreover, spot trading allows for immediate execution, which helps traders capitalize on short-term price movements.
Spot traders will own the assets they buy and sell. Therefore, they’ll get to use their tokens for various purposes, from executing online payments to crypto staking.
Spot Trading Risks
Spot trading comes with several risks, such as:
Cryptocurrency prices are subject to frequent fluctuations. This means that spot traders will have to regularly monitor crypto markets to know when it’s the right time to buy and sell.
Spot trading doesn’t offer leverage. Users will have to use their funds to conduct trades. The lack of leverage can lead to reduced profits. Moreover, spot trading only allows the buying and selling of crypto coins, which makes it less lucrative for professional traders.
Liquidity is very important in trading. High liquidity provides competitive prices and it indicates that there’s a large number of active trades. However, if the liquidity pool is low, traders will not be able to sell their coins at a good price.
Spot Trading vs Margin Trading
The main difference between spot and margin trading is that spot trading investors use their funds to buy and sell their coins. On the other hand, margin traders use borrowed funds to conduct trades.
You can see other differences between spot and margin trading in the table below:
Features Trading Model Leverage Risk Yes Higher Profit Potential 2x-20x
Executing transactions using money
Executing transactions using borrowed funds
Spot Trading vs Futures Trading
What distinguishes futures from spot trading is that the former is more suitable for long-term trading. Futures traders earn profits by predicting changes in crypto prices. This means that they buy and sell digital currencies at predetermined prices and dates. Other differences include:
Features Suitable For Fees Prices Based on spot prices Derivative markets Yes On a specific (predetermined) date
Short-term trades, beginners
Long-term trades, experienced traders
Based on demand and supply
Based on spot prices
On a specific (predetermined) date
Can You Make Money With Spot Trading?
Yes, people can make money by buying digital assets at their current price and selling them when their price goes up. The best crypto coins today offer lucrative opportunities for spot trading. Keep in mind that profits from spot trading will become real only when you convert cryptocurrencies into stablecoins or fiat.
On that note, the profitability of spot trading will depend on several factors.
Understanding the Crypto Market
The more you understand the trends and dynamics of the crypto market, the easier it will be for you to determine the right moment to sell or buy a certain crypto coin.
Use of Strategy
Each trader will use the strategy that suits them best. Some will focus on daily trades, while others will prefer using a long-term approach.
Fluctuations in prices can create great profit opportunities and great risks. Namely, high volatility will result in either higher profits or higher losses.
Another factor that will affect the profitability of spot trading refers to market conditions. On that note, bull markets are generally more suitable for spot trading than bear markets.
Spot trading is a great way to enter the world of cryptocurrencies, as its model is based on a simple principle. Traders buy coins or tokens at their current market price and sell them at a higher price. Likewise, spot trading is ideal for short-term investors who prefer immediate earnings.
The main advantages of spot trading are simplicity and lower risks, while its main downsides include volatility and liquidity.
What is a spot position in crypto?
What is spot buying?