What is spot trading in crypto, and how does it work?

December, 30th 2023

spot trading in crypto

Many traders do not know what is spot trading in crypto. Crypto spot trading allows traders to trade and invest in digital assets. Spot trading is preferred by beginner crypto traders over leverage or futures trading because it provides a simpler trading experience and allows you to own the digital assets you purchase. This post will tell you about what is spot trading in crypto and how it works. However, getting started with cryptocurrency does not have to be difficult.

In fact, before you feel confident competing with professionals who employ such tactics, you should consider something simpler, such as DCAing and HODLing. If it seems unfamiliar to you, you've come to the correct place. This post will look at a wonderful approach to learning what is spot trading in crypto and how it works: simply purchasing it at the current market price. This is known as a spot order in both the crypto and traditional finance markets.

What is a spot market in crypto?

Before you learn about what is spot trading in crypto, you must know about the spot market. A spot market is an essential market where crypto purchases are instantly swapped and settled, and traders in this market are interested in purchasing digital currencies or other altcoins and hoarding them until their value rises. "Spot trading" refers to transactions that are settled "on the spot." Sellers, buyers, and order books are also present in spot markets. Sellers place an order with a specific ask or sale price, and buyers put an order with a specific bid or purchase price for any cryptocurrency token.

The offer price is the lowest amount that a seller is willing to take as payment, while the bid price is the maximum amount that a buyer is willing to spend. The ask side of the order book is for buyers who are ready to purchase, and the bid side is for sellers who are ready to sell. Bids and requests are noted in the order book when Bob places an order to buy Bitcoin.

What is spot trading in crypto?

The basic idea behind what is spot trading in crypto is for traders to purchase cryptocurrency assets and hold them until their value increases. When you learn about what is spot trading in crypto, then you will be able to get high profits. For instance, trader Sue purchases a position in Bitcoin with the expectation that she will eventually be able to sell it for a profit. When you trade a spot, you use your own funds to purchase the asset. This implies that the amount you can purchase is limited to what you can afford.

As a result, it is seen as somewhat safer than other trading markets. The worst-case situation is that you lose every cent of your investment. Margin trading is one of the other trading strategies that can cost you much more. In this market, you won't ever have to sell, not even if the token loses all of its value. Buying or selling contracts that bind you to purchase or sell a specific quantity of bitcoin at a future date and price what is spot trading in crypto entails. This is not the same as other types of cryptocurrency trading, including futures or options trading. Spot trading, on the other hand, only entails exchanging cryptocurrencies instantly at their current market value.

Examples of cryptocurrency spot trading:

To maximize trading profits, the fundamental principle of spot trading is to buy low and trade high as often as you can.

Take a look at the following examples, which use Bitcoin (BTC) and the well-known stablecoin Tether (USDT) to better show how this functions. Bob puts in a purchase order at $48,000/BTC to obtain 1,000 USD in BTC. Bob is paired with Alice, who makes the offer to exchange BTC for USDT at the stated rate.

The order will be filled and carried out as soon as Bob and Alice agree. Alice will get $1,000 USD, and Bob will earn $0.0208 BTC.

Case 1:

If Bob decided to sell his coins after a day and the price of bitcoin rose to $49,500/BTC, he would have made a profit of 29 USDT because his coins would have been valued at about 1,029 USDT.

Case 2:

Bob would have to sell his coins for about 967 USDT if, after a day, the price of bitcoin dropped to $46,500/BTC. Bob lost thirty-three USDT.

How Does Crypto Spot Trading Work?

Users can purchase or sell cryptocurrencies in real-time at the going rate on the market, thanks to crypto spot trading. The basic steps of what is spot trading in crypto are as follows:

Select a cryptocurrency exchange: Selecting an exchange that allows for spot trading is the first step. Binance, Coinbase, and Kraken are a few well-known exchanges.

Create an Account: After choosing an exchange, you need to register an account by entering your personal details and confirming your identification.

Put money into your account: You need to fund your newly created account with either fiat money (like USD or EUR) or another cryptocurrency.

Select the cryptocurrency pair: The cryptocurrency pair you wish to trade must be selected. As an illustration, you would select the BTC/USD pair to purchase Bitcoin with US dollars.

Order: After deciding on a cryptocurrency pair, you may place an order to purchase or sell the asset at the going rate on the market. Additionally, you have the option to put in a limit order, which enables you to choose a specific price at which you wish to purchase or sell cryptocurrencies.

Execute the trade: If your order is approved, the deal will happen right away, and the cryptocurrency you bought will land in your exchange wallet.

Withdraw your funds:Finally, you can take your money out of the exchange and deposit it into your personal wallet (either fiat money or cryptocurrency).

It's crucial to remember that cryptocurrency prices are subject to sudden fluctuations and can be quite volatile. Therefore, it's crucial to use prudence and carry out independent research before participating in spot trading.

Benefits of Crypto Spot Trading

Now that you are fully aware of the fundamentals of what is spot trading in crypto and how it operates in the bitcoin space, let's examine some of its benefits.

Simplicity:

Spot orders don't require any intricate platforms, wallets, or equipment. All you have to do is purchase the asset at its current price! Furthermore, because of its simplicity, purchasing at the spot price can be easily combined with other winning tactics like DCAing and HODLing. The act of holding cryptocurrency for an extended period of time with the expectation that its value would rise is known as "HODLing." Granted, this is by no means a certainty, but for blockchains with robust communities and active use cases, it may be wiser to just retain cryptocurrency for a few years. Even more successfully, you may keep tabs on these assets by employing the dollar cost averaging (DCA) approach.

Check out the page on Dollar-cost averaging for the complete explanation; in essence, the method entails buying a cryptocurrency on a regular basis for the same amount of fiat money each time, regardless of the spot price at that moment.

Accessibility:

Spot orders also have the important benefit of being easily accessible. To clarify, spot orders are available in nearly every country in the world and can be placed on a variety of platforms. This greatly increases everyone's accessibility to cryptocurrency spot trading.

Less risk than numerous other crypto trading strategies:

Before you get too carried away, keep in mind that trading always involves some risk. When comparing spot trading to leverage trading, the former has the lowest relative risk. This is due to the fact that leverage trading entails taking out loans, which may put your assets in danger. Spot trading, on the other hand, simply entails buying and selling an asset at its present price. It's also arguably less risky than crypto futures trading because the market is so hypothetical that buying a cryptocurrency without understanding what the market will do is risky.

Risks of Crypto Spot Trading:

Cryptocurrencies are inherently volatile, and crypto trading comes with its own set of risks, ranging from bank runs on exchanges to hackers and attacks.

Market volatility:

The cryptocurrency markets are quite volatile. Anyone who trades cryptocurrencies on the spot must be exceedingly cautious in order to avoid losing a significant portion of their capital due to price swings.

Liquidity crunch:

During downturn markets, liquidity can become an issue for spot traders. If an asset's liquidity dries up, traders may be unable to sell it or encounter significant slippage during trades.

Trading platform:

When it comes to spot trading, the price of your assets is not the only thing to consider. The platform you select can also be a significant security factor. For example, numerous centralized cryptocurrency exchanges have gone bankrupt in the past. As a result, those platforms' users were unable to withdraw their monies. So, if you go with a centralized platform, make sure you do your homework.

Decentralized exchanges (DEXs) allow for self-custody, which means you retain ownership of your assets. However, as compared to their centralized equivalents, DEXs may appear less user-friendly to most beginners.

Conclusion:

Spot orders are complex: not every cryptocurrency user approaches them in the same manner. You may elect to HODL your funds using dollar cost averaging, or you could utilize them to spot trade and profit in the short term. You could even have a completely different strategy! That being said, there are a few essential considerations you should take before pressing confirm with your crypto wallet, as with any other crypto trading strategy. Spot trading, while considerably simpler than other strategies, is not without danger.

However, before purchasing any cryptocurrency, you must conduct an extensive study about what is spot trading in crypto. There is no other option but to learn what is spot trading in crypto and research cryptocurrencies as much as possible. Furthermore, being up to date on crypto market news and expected future developments may assist you in identifying investing opportunities.