Spot Trading In Crypto
Spot trading is a popular investing approach that allows traders to easily invest and trade in financial assets. A spot transaction will be many crypto traders’ first engagement with cryptocurrency. Where they will do a spot transaction on the spot market, such as acquiring Bitcoin at the market price and HODLing the coin until its value rises.
We will describe how spot trading works in the cryptocurrency market in this article.
What exactly is spot trading in cryptocurrency?
Spot trading in cryptocurrency is the process of purchasing and selling cryptocurrencies at real-time rates in order to make a trading profit.
Unlike investing in cryptocurrency, which often entails keeping (or “HODLing”) a crypto asset for the medium or long term, spot traders buy and sell a variety of cryptocurrencies in an attempt to create consistent short-term profits.
Spot trading involves taking ownership of the cryptocurrencies you buy and giving up control of the cryptocurrencies you sell. This is distinct from trading crypto CFDs, in which you trade a financial product that tracks the price of a cryptocurrency rather than the cryptocurrency itself.
Assume the current spot price of Bitcoin is $20,000, and a buyer purchases one BTC on the spot market for $20,000.
- Assume the price of Bitcoin grows to $40,000 in one month.
If the buyer sells the BTC for [PnL Amount = (Selling Price – Buying Price) * Trade Volume], ($40,000 – $20,000) * 1 = $20,000, the buyer makes a $20,000 profit.
- Assume the price of Bitcoin falls to $10,000 after one month.
If the buyer sells the position, pursuant to [PnL Amount = (Selling Price – Buying Price) * Trade Volume], ($10,000 – $20,000) * 1 = -$10,000), the buyer loses $10,000
What exactly is a spot market?
A spot market enables traders to buy and sell assets at current market prices. Crypto spot market transactions are paid on the ‘spot’ soon after both the buyer’s and seller’s orders are satisfied. Buyers, sellers, and an order book are all required in a spot market.
You can choose to trade various cryptocurrencies in certain pairs in the crypto spot market.
The crypto spot market, in general, is vulnerable to massive volatility that reflects traders’ market sentiments. Several factors influence these feelings, causing traders to buy or sell. Spot traders frequently utilise several fundamental and technical analysis approaches to make trading decisions.
Where can you trade cryptocurrency on the spot market?
Over-the-counter, peer-to-peer, centralised, and decentralised crypto spot markets are all accessible. Let’s look at each type of cryptocurrency spot market.
Over-the-counter (OTC) spot trading occurs between two parties outside of cryptocurrency exchanges. Market makers are dealers/brokers who quote multiple rates at which they will buy/sell a coin. OTC trading is frequently less expensive than exchange trading, and the price of trading is not always revealed to third parties.
OTC spot markets are often private and less regulated than exchange markets. Furthermore, they enable traders to buy and sell larger amounts of cryptocurrency without significantly affecting the market price.
Peer-to-peer trading enables traders to trade cryptocurrencies with one another. Peer-to-peer trading, like OTC, can be conducted without the involvement of third parties or intermediaries.
P2P trading allows you to have greater control over your trading activities, such as selecting vendors and buyers, settling time, pricing, and payment methods. To facilitate trades, most P2P systems require buyers and sellers to set bids and offers based on their preferences.
While P2P has many advantages, the trading environment can be dangerous without third parties arranging trades between traders through escrow services. P2P trading can also be hampered by a lack of liquidity and a lengthy settlement period.
Centralised exchanges (CEXs)
Centralised exchanges, like traditional stock exchanges and online brokerages, perform large-scale cryptocurrency transactions by matching buyers and sellers using the order book mechanism.
CEXs also offer custody services, letting you deposit and store your cryptocurrency assets on their platform. You can benefit from more liquidity on your favourite asset, faster trading times, security, and client protection by using centralised exchanges. CEXs charge users transaction fees on every trade they do in order to provide these services. CEXs are now the most popular way to access the crypto spot market.
Decentralised exchanges (DEXs)
Decentralized exchanges are systems that enable you to access the spot cryptocurrency market without the use of brokers or intermediaries. Users often trade against the liquidity in a sort of smart contract known as an automated market maker, as opposed to the old P2P technique or CEXs (AMMs).
Users can trade cryptocurrencies directly from their wallets without giving up ownership of their assets. You may access the spot market using decentralised exchanges without giving up your privacy or eliminating counterparty concerns.
DEX trading fees are often lower. When their blockchain networks become overcrowded, transaction fees can soar. DEXs might also have limited liquidity and are not as user-friendly as their centralised counterparts.
Benefits of spot trading in crypto
Let us look at the advantages of trading cryptocurrencies on the spot market.
- When compared to margin-based cryptocurrency trading, spot trading is less risky. You can buy assets without the risk of being liquidated due to price volatility.
- Spot trading is straightforward to understand. When trading in the spot market, you can simply calculate your profit or risk.
- Spot trading provides more accurate cryptocurrency values since transactions take place in a transparent method based on demand and supply.
- Spot trading enables you to use your cryptocurrency holdings for other purposes, such as staking or making online payments.
- Spot trading allows you to trade on a large variety of cryptocurrencies, as opposed to other methods of trading, which have fewer currency pairs.
Risks of spot trading in crypto
There are dangers and drawbacks to crypto spot trading. We’ve highlighted the most important ones for you below.
- A significant portion 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 smaller.
The information should not be interpreted as a recommendation, an offer to buy or sell, or the solicitation of an offer to buy or sell any security, financial product, or instrument, or to engage in any trading strategy. Readers should seek their own counsel.
Thank you for taking the time to read this. I hope you enjoyed our blog and found knowledge about spot trading in crypto that you will find useful in the future. Behindyourgoals has more articles related to finance, banking, crypto and much more.