What Is Spot Trading in Crypto?

 

Key Takeaways

The SEC approved 11 new spot bitcoin ETFs on January 10, 2024, sparking renewed interest in crypto spot trading. But, you may wonder, what exactly is spot trading in crypto, and how does it work?

Spot trading in crypto involves buying and selling digital assets at their current market price or on the spot. Unlike futures, where you’re trading futures contracts but not crypto itself, spot trading lets you own and trade crypto directly. It’s straightforward—you trade your crypto based on the real-time price, and what you see is what you get, making it an essential tool for new and experienced traders. You might simply refer to spot trading as buying and selling crypto.

Let’s explore spot trading in more detail, how it works, and more in this article.

What Is Spot Trading in Crypto?

Spot trading is the immediate exchange of one cryptocurrency for another at the current market price. The term spot trading comes from the action of trading on the spot.

Spot traders usually aim to profit from price fluctuations in the market within the shortest time possible. They acquire assets when they expect prices to go up and dispose of them when they’ve made a profit via a price increase.

Unlike other types of crypto trading, spot trading does not involve contracts or expiry time. Traders simply buy and own crypto directly, and sell it for a profit. Traders can instantly trade their assets at the prevailing market price without worrying about future contract obligations. 

How Does Crypto Spot Trading Work?

The idea behind trading, even spot trading, is simple: buy low, sell high. A straightforward formula to benefit from trading. But how do you ensure you’re profiting from crypto spot trading? The foundation is learning the essentials of spot trading.

Understanding how crypto spot trading works involves comprehending concepts that form the basis of this process:

• Order books
• Bid price and ask price
• Market order
• Limit order

Let’s take a closer look at each of those now.

Order Books 

In a cryptocurrency exchange, the order book is an electronic record of an asset’s buying and selling orders. It shows the quantity of assets buyers are willing to purchase (bids) and the amount of assets sellers are eager to sell (asks) at various prices. The order book is essential because it reveals the supply and demand for an asset.

Bid Price and Ask Price

The bid price is the maximum amount a buyer can and is willing to pay for an asset, while the asking price is the minimum amount a seller is willing to accept. The distance between these two prices is the spread. A trade occurs when a buyer’s offer price meets a seller’s asking price. Spot trades occur when a buyer’s bid matches a seller’s ask.

Market Order

A market order is a straightforward way to buy or sell an asset. Placing a market order informs your broker or service provider to execute the trade immediately at the best available price. It’s fast, but there’s a catch. You might not receive the exact price you expect, especially in a volatile market. The main point is executing the deal as fast as possible, an ideal scenario for those prioritizing speed over precision.

Limit Order

With a limit order, you are in charge of specifying the exact price you are willing to pay or receive. The trade only happens if the market matches your price, ensuring you receive your preferred deal. However, if the market fails to reach your limit, there is a possibility that your trading platform won’t execute the trade. Limit orders are a popular choice in unpredictable markets as they can help mitigate the impact of sudden price changes.   

Here’s how a typical spot trade works:

1. Pick a reputable crypto trading platform
2. Sign up and verify your account 
3. Deposit fiat or cryptocurrency
4. Choose a trading pair
5. Place a market or limit order, and start the trade. 

You’ll receive the cryptocurrency in your exchange wallet. You can send it to your personal wallet.

Jamie wants to purchase Bitcoin (BTC) using USD on a spot trading market. He believes the price of BTC will increase in the short term. First, Jamie selects a reputable cryptocurrency exchange. After signing up and verifying his account, he deposits USD into his exchange wallet. Then, he chooses the BTC/USD trading pair.

To initiate the trade, Jamie places a market or limit order. A market order buys or sells BTC at the current market price. A limit order specifies the price he’s willing to buy or sell. If Jamie places a market order, his trade will be executed immediately at the best price. If he places a limit order, the trade will only execute if the market price reaches his specified price.

Spot Trading Crypto: Step-by-Step Guide

So, what are the factors you need to consider when spot trading? Here’s a step-by-step guide:

1. Depending on the market analysis, decide whether to buy or sell and at what price level to enter the trade, analysis. 
2. Find out the current spot market of the cryptocurrency pair of your interest, trading volumes, and prevailing market conditions. 
3. Select a reliable platform for trading cryptocurrencies that offers spot trading, including Binance, Coinbase, or Kraken.
4. Sign up for an account on the exchange, input your details, and go through the verification process. 
5. Deposit fiat currency such as USD or cryptocurrency for use in trading. 
6. Choose the cryptocurrency pair you wish to trade, for instance, BTC/USD or ETH/BTC. 
7. Place a market order to buy or sell at the current market price or a limit order to specify the price at which you want to execute the trade. 
8. Where your order finds a counterparty order, the trade is done instantly at the prevailing market price. 
9. The cryptocurrency you buy will reflect in the exchange wallet, which you can transfer to your wallet.
10. Monitor the market and exit the trade if you have reached your target price, cut losses, or if the trade is going against you.

Remember, the prices of these cryptocurrencies are unpredictable, and therefore, it is essential that you do your homework well, take the necessary risks, and invest an amount that you are willing to lose. 

Pros and Cons of Crypto Spot Trading

Spot trading is one way to make good money in the short term, but like any other trading option, it features risks you need to know before you start trading. Let’s start with the benefits:

Pros of Crypto Spot Trading

Immediate execution: In spot trading, you can purchase or sell cryptocurrency at the current price without waiting for the order to be filled, which is perfect for short-term trading. 

Simplified process: Spot trading is less complex than futures or options trading and does not demand as much knowledge as the latter. 

Low fees: Spot trading is generally cheaper than other trading methods, which is why it is suitable for trading cryptocurrencies.

High liquidity: Crypto spot markets are usually characterized by high liquidity, which means that many buyers and sellers are in the market, making it easy to execute trades.

Cons of Crypto Spot Trading

Volatility: Cryptocurrencies fluctuate relatively high; therefore, spot trading can be risky due to the volatile market. 

Limited options: Spot trading is limited to the current market price, which offers the trader fewer trading opportunities than other methods.

Crypto Spot Trading vs Crypto Futures Trading

Crypto futures trading is the act of trading contracts that require the buyer and seller to trade a particular amount of cryptocurrency at a specific price at a future date. It lets traders speculate on price movements without holding the actual asset. By contrast, spot trading trades the crypto directly.

Below are the key differences between crypto spot trading and crypto futures trading:

• Underlying asset
• Execution timing 
• Complexity and risk

Underlying Asset

When you trade crypto on the spot market, you’re trading the actual digital asset at the current price. It’s simple: you own the coins or tokens immediately, and you can hold, sell, or transfer them as you wish. However, crypto futures trading is different. Here, you’re dealing with contracts that agree to buy or sell the asset at a future date. You don’t own the asset itself, you own a contract that bets on the future price of the asset. The distinction enables traders to speculate on price movements without holding the cryptocurrency.

Execution Timing

In spot trading, transactions occur immediately, and the trader can take advantage of the price changes occurring in the market. On the other hand, futures trading involves a contract of trade at a future date. So futures contracts have an expiry date, while crypto itself does not.

Complexity and Risk

Spot trading is less complex than the other types, making it ideal for new entrants in the market. Futures trading, however, requires more insight into the market and future price direction, hence adding more risk, especially with leverage.

Spot trading is more appropriate for investors who want to purchase or sell cryptocurrency at the current market price. Futures trading is ideal for people who wish to bet on future price changes or minimize risk. 

Crypto Spot Trading vs Crypto Leverage Trading

Crypto leverage or margin trading enables traders to take a loan to help them open a more prominent position and enhance profitability. Leverage means a trader can control more cryptocurrency than they can afford to use personally. However, leverage trading also increases the probability of heavy losses if the market turns against its position.

Here’s how crypto spot and leverage trading differ:

• Risk and Reward
• Ownership

Risk and Reward

In spot trading, traders purchase or sell the cryptocurrencies at the current market price. Therefore, it is less risky than margin trading as the traders are not using other people’s money. Leverage trading may result in a higher profit if the market is on the trader’s side, but it also has higher risks since traders can lose more than their initial capital. 

Ownership

Spot trading gives you full ownership of the asset, meaning you can hold onto it for as long as you like. You’re not just speculating; you own the cryptocurrency. Leverage trading, however, is more about speculation. You’re betting on the price movement without owning the underlying asset, exposing you to greater market volatility and risk.

Crypto Spot vs. Futures vs. Leverage Trading

Here’s a quick comparison between all three crypto trading strategies, including their benefits, essential elements, and risks.

Closing Thoughts

Spot trading in crypto is one of the simplest ways of trading cryptocurrencies at the existing market price. It is suitable for those who wish to have direct control of their cryptocurrencies and make quick profits from price fluctuations. Spot trading is less risky and less complicated than other forms of trading, such as futures or leverage trading, but it does involve knowledge of the market. While spot trading is perfect for beginners, even experienced traders can benefit from it, mainly because of the high liquidity levels in spot trading.

FAQ

Is spot trading crypto profitable?

Spot trading can be lucrative, but it is not without risks, and more to the point, it is not a sure way to make profits. Market factors influence profitability, the timing of trades, and the trader’s skills. There are ways through which traders can increase their likelihood of success, including using technical tools like charts and stop orders.

What’s the difference between Bitcoin spot trading and the Spot Bitcoin ETF?

Bitcoin spot trading is the trading of Bitcoin at the current market price for the physical delivery of the commodity. On the other hand, a Spot Bitcoin ETF is an Exchange-Traded Fund that enables investors to buy shares of a huge fund containing Bitcoin. This means you can get exposure to BTC without worrying about owning and securing crypto. The shares of the ETF track the price changes in Bitcoin.

What Is Crypto Leverage Trading?

Crypto leverage or margin trading allows traders to take a loan to amplify their trading exposure. It enables them to manage more cryptocurrency than the amount of capital they have would allow. Leverage, on the other hand, can increase the profits earned, but at the same time, the losses are also magnified in case the market turns against you. For participants, it is essential to comprehend the required margins.