Crypto assets have been widely adopted and grown in the financial market since their inception. Several traders all around the world have started to upgrade their trading portfolios and profiles with different crypto assets. Cryptocurrency trading is where traders sell and buy crypto assets to gain profit.
Certain factors describe the trading process in the crypto space, such as the trading approach, mode of operation, and, most importantly, the goal behind carrying out the trade.
For instance, the aim of crypto trading may be to exchange an asset or currency. In addition, the type of transaction, such as perpetual contracts, futures or options, etc., also decides how crypto assets are traded.
A complete set of guidelines chalked by the trader regarding the buying and selling approach of crypto assets determine the trading strategy of that particular trader. One of the techniques and methods used by traders in the market is spot trading.
Using this strategy, the traders aim to sell their assets at higher rates in the future after investing in them initially. Moreover, traders can place a buy or sell order in a spot market by instantly exchanging their cryptocurrency with fiat currency.
This detailed guide article related to spot trading will elaborate on its working over different platforms and the advantages and disadvantages integrated with it.
What is Crypto Spot Market?
In the crypto space, a spot market is a base where traders can instantly exchange and settle their crypto assets. In a spot market, the investors may get an opportunity to trade multiple digital currencies such as Bitcoin or other altcoins and keep them until their value increases.
As the transactions related to these markets are carried on the spot, it is referred to as spot trading. The order books, buyers, and sellers all are part of a spot market. A specific ask or sell price is demanded by the sellers, whereas the buyer also sets a particular bid or purchase price to buy any crypto asset.
The highest possible price that any buyer is willing to pay to purchase an asset is the bid price. In addition, the lowest possible price that any seller is ready to accept to give away a particular asset is the ask price.
There are usually two sides integrated with an order book: the ask side and the bid side. The bid side is for the sellers who want to sell any asset, and the ask side is for the buyers who have to purchase the product.
If any buyer wants to place an order for any cryptocurrency in the market, this will immediately fill up the bid side of the order book after the transaction is carried out. The order will be filled automatically when any trader from the trading spot on a crypto platform decides to sell the assets with the exact specifications.
This transaction is then transferred to the bid side of the order book when the buyer then decides that he has to sell the particular cryptocurrency he has bought initially.
The colour code of the orders in the order book helps the sellers and buyers to determine the side. The red is for the sellers of any particular token, and the green signifies the buyers in the order book.
What is Crypto Spot Trading?
The main aim of crypto spot trading is to earn maximum profit from investment by buying any particular asset at a lower price and then selling it at a higher one. However, keeping in mind the volatility of crypto markets, one cannot be assured that this technique will work out for him.
However, the three crucial concepts in spot trading are the spot price, the date of trade, and the date for settlement. The spot price is the current price of that asset. This is the price at which the traders can sell any asset instantly. Moreover, using this price over various platforms, the traders can buy or sell other crypto assets.
Whenever the old orders are completed, and the new ones are placed, the spot price changes. This marks the start of the trade date. It represents the date the market performed the trade and records all the transactions. However, it is the settlement date on which the assets are transferred during the transaction. It is also known as the spot date.
It is impossible to predict the gap between the trade and settlement dates. It may vary between one to several days depending upon the type of market where trade is being carried out. This process may differ for different platforms and exchanges; however, it occurs on the same day for cryptocurrency trade.
Working of Crypto Spot Trading
Traders can get an opportunity to sell or buy assets at the best available option for spot price utilizing the market order on any exchange or trading platform. There is a variety of cryptocurrencies that are offered by a spot market. It may include Bitcoin, BNB, Ether, or even traditional currencies.
Crypto exchanges provide several methods for traders to sell or buy crypto coins. However, there are other technical and fundamental approaches adopted by spot traders to make correct trading decisions. The spot trade can be carried out at decentralized exchanges (DEXs), centralized exchanges, or over-the-counter (OTC) markets.
Any trader who wants to use a centralized exchange platform to carry out trade must transfer the currency he wants to trade into his account.
However, the traders often have to pay a fee for carrying out trade activities or listings on centralized platforms. On decentralized platforms, blockchain technology is implemented to match selling and buying orders.
Moreover, using smart contracts, traders can directly implement the crypto trading strategies from their wallets. Brokers that carry out the trade on behalf of the traders can be used on the OTC platforms to perform the trading activity. In addition, customers can also use their mobile phones for this purpose in the advanced internet era.
Advantages of Crypto Spot Trading
The trader can become the owner of any asset after buying it at the spot price. It also allows him to relocate the purchase or sell it offline as per his convenience.
Moreover, the traders can use their crypto assets for multiple other purposes, such as staking assets or for online payments using spot trading. Some of the significant pros of crypto spot trading are mentioned below.
- Transparency
The supply and demand phenomenon in the market drives the prices only in contrast to the futures market, where there may be a lot of reference prices to set one. The market price in Binance for futures is derived using several factors such as the Moving Average Basis, price index, funding rate, etc.
- Straightforwardness
As the regulations, rewards, and risks involved in the spot market are straightforward, they can be used by traders conveniently. Traders can calculate the risk factor involved in trading on different platforms using the asset’s current price in the market and their entry price.
- Less Risky
However, there is relatively less risk involved in spot trading than in carrying out margin trading. The traders do not have to worry about the margin calls and continue to trade in the market without thinking about losing funds due to market fluctuations.
- No Margin Calls
Due to the absence of any margin call, the trader does not need to contribute additional funds on his part as there is no risk that he may lose any more funds than he possesses in his account as there are no chances of liquidation in the spot market. The trader can enter a market or leave it whenever he wants.
Disadvantages of Crypto Spot Trading
It is mandatory to notice that spot trading does not offer the traders any amplification in the potential return from the trade that is usually provided by leveraged products in margin trading. It is considered one of the significant flaws of spot trading. A few other disadvantages of crypto spot trading are mentioned below.
- Protection of Assets
During the crypto spot trading, there may arise a condition where the traders will be left with assets in the market that are difficult to deal with and protect. In a traditional market, when one buys a good or product, he can easily carry it to his place.
However, while dealing with crypto, one has to take great responsibility to protect his tokens and coins from any scam or fraud in the market. In the case of carrying out the trade with derivatives, one has to deal with cash to get exposure in the market.
- Instability
It is essential to have a stable value and platform for specific businesses and companies to earn profit. Any company that wants to trade forex in an international market must be compatible accordingly. However, the planning and income resources become pretty unstable if the traders only rely on spot markets for earning.
- Lesser Potential Gain
As no leverage is involved in spot trading, the potential profit earned through spot trading is also usually lower than that gained through margin trading, as leverage provides the opportunity for the traders to enhance their gains by increasing their exposure in the market.
How to Carry out Crypto Spot Trade on Binance?
Spot trading using a crypto platform is an easy and convenient platform after one has created a Binance account. However, there are no crypto spot trading charges for Bitcoin on the Binance platform or spot trading pairs on BUSD. The following steps can be followed to carry out spot trading on Binance.
- First, the trader has to open the Binance site and look for the Trade option. After this, to get access to the spot trading platform, choose for Spot option.
- However, the trader might not see a few exciting options on the trading view interface.
- At the top of the website, one might locate the options of market data such as crypto trading date, market volume, changes in daily price, etc.
- The order book contains all the sell and purchase orders available for any product sorted concerning price. Using this chart view, the trader can easily customize his historical price data. The complete and comprehensive range of technical tools can be accessed through the Trading View option available on windows.
- At the top right corner, one can look for different options for trading pairs. The favourite crypto trading pairs can also be saved by clicking the tiny stars. In addition, The traders can also choose the trading pair of their choice in the spot market.
- In the end, in this section, the sell or purchase order of the trader will be created. Moreover, to conduct the spot trade transaction, the traders can select from different charges such as stop-limit orders, market or limit, etc.
What is the Difference Between Futures Trading and Spot Trading?
To deliver immediately, the traders can conduct spot trades instantly. Whenever a buyer and a seller coincide with getting any given quantity of an item exchanged for a given price, they pay for the contracts in the future market.
After the expiry of the agreement on the settlement date, the buyers and the sellers do not hand over the asset; instead, they create an official settlement.
The differences between futures trading and spot trading are mentioned below.
- Investment Strategy
In spot trading, traders can hold on to an asset after purchasing it and then sell it later when there is a considerable increase in the price. On the other hand, in futures trading, traders have to buy or sell any asset at a price determined beforehand and at a given date by agreeing to a contract.
- Purpose
In spot trading, the aim is to get the product delivered immediately. However, in futures trading, the main goal is to provide a blockage to the risk position in the market.
- Investment Principles
The main principle in spot trading is to buy an asset at a relatively lower price and then sell it further when the prices in the market rise. On the contrary, going long or short is the main idea behind futures trading.
What is the Difference Between Margin Trading and Spot Trading?
During spot trading, to get quicker delivery of the underlying asset; usually, short-term trades are opened by the day traders. These trades may have low spreads and may not have any expiration dates. Spread is the difference between the price offered for an asset and the selling price of that asset during trading.
However, in margin trading, the trader borrows money from a third party to take a significant position in the market. It assists them in earning a substantial gain by making interest.
However, the traders are advised to take precautionary measures to avoid losing all of their initial investment, as margin trading also increases the chances of potential loss.
The differences between margin trading and spot trading are mentioned below.
- Leverage
Spot does not involve any leveraged products; therefore, it provides less potential gain to the traders than margin trading, which involves leveraged products.
- Profit Opportunities
In spot trading, the traders profit by buying an asset at a relatively lower cost and selling it at a higher one. It means when the price moves in an upward direction, and the trader earns a profit. However, in margin making, a gain is achieved by the trader when the price fluctuates in either direction, whether it be upward or downward.
- Capital Requirement
To initiate spot trading, the traders need a high capital to invest. However, the capital requirement in margin trading is low initially.
- Investment Principle
The investment principle in spot trading is lower, whereas it is relatively higher in margin trading because of leveraged products involved.
Is it Profitable to Spot Trade Cryptocurrencies?
Usually, a dollar cost average technique is applied by the traders in the market generally. However, to spot the actual profit from the trade, they wait for the next bull market. However, as traders are aware of the volatility of the crypto market, they have to be patient enough to earn the rewards.
Moreover, it is always advised to the traders to show diligence before finalizing any decision regarding the crypto market. It may save them from any potential loss or risk at any point. All traders in the market have a trading profile that reflects their ability to cope with crypto market risks.
However, being volatile, the pros and cons of crypto assets should be looked upon after properly analyzing one’s risk-coping tendencies. Therefore, traders should use all possible protective measures before taking any final decision regarding the strategies and techniques to be adopted and the assets to be traded in the financial market.
Conclusion
Currently, crypto spot trading in spot markets is becoming popular among traders. Being a more accessible and more convenient method to trade, beginners in the crypto space can adapt it to earn potential gains through crypto assets.
However, it is always recommended to conduct a thorough fundamental and technical analysis of market conditions and fluctuations before investing.
