What Is Spot Trading in Cryptocurrency, and How Do Spot Markets Work?

Spot Trading

Are you interested in trading or investing in cryptocurrencies? Does the idea of buying and selling cryptocurrency and other digital assets appeal to you? If your response to these two questions is positive, you might be interested in spot trading as it involves directly and instantaneously exchanging financial instruments and assets.

That sounds interesting, right? Read on to understand how spot trading for beginners works? What is the future and features? Have a look at below given terms regarding this trading in detail below.

Spot Trading

Spot Trading: How It Works

The concept of spot trading is quite simple. For example, Alice buys Bitcoin now, intending to sell it later at a higher price. She can also exchange her Bitcoin for Ethereum if she so wishes.

Features of Spot Trading

It has many important features that differentiate it from other forms of trading. A major feature is the speed of transactions.

Transactions in this are processed immediately, or “on the spot,” unlike the other trading options, which might take days.

Also, you buy the assets to be traded with your own money. There’s no use of leverage here as seen in other trading types, for example, margin trading. You cannot buy more than your money’s worth, so you cannot lose more than you invested.

Spot Trading and Margin Trading

Spot traders purchase assets with their funds, while margin traders borrow capital to purchase assets. This allows them to purchase assets in larger quantities. However, they are forced to meet certain margin requirements to avoid a margin call.

Margin trading is often referred to as leverage trading. It is often seen as riskier because a lost trade results in greater losses than the comparable price shift. An exchange in margin trading allows a trader to make greater profit on an assumed borrowed capital. However, traders lose just as much as they win from little market movements.

Spot Trading and Futures Trading

In spot trading, you own the underlying assets. In futures trading, you do not; you only predict the asset’s future value. In the futures market, you agree to buy or sell an asset on an agreed-upon date at an agreed price.

Furthermore, futures trading allows you to purchase assets that cost more than your deposit using the power of leverage. When a futures contract expires, buyers and sellers settle themselves in cash rather than trade assets.

Spot Trading and Buying

Spot trading involves more than just buying, even though the terms are often used interchangeably. First off, unlike buying, a trade is completed only after a sales transaction is made and the trader realizes a profit or loss.

Another difference between trading and buying is that you can only trade with your existing capital. In other words, you can borrow money to buy assets, but you cannot borrow money to trade in a spot market.

Spot Markets

Spot markets allow traders to trade assets quickly at the market price. There are two major types of spot markets, both of which can be centralized or decentralized.

Exchanges allow traders to conveniently buy and sell cryptocurrency and other digital assets at the market price. A good exchange will also offer other services, such as live price monitoring.

Another type of spot market is the over-the-counter (OTC) market. These trades happen between two parties who agree on a mutual price, irrespective of the market value.

Conclusion: Should You Choose Spot Trading?

Now you understand how spot trading in crypto works and how it compares with other trading options. But should you choose it over those other options? Here are the pros and cons of spot trading to guide your decision.

Safety is a major advantage of spot trading; lack of leverage prevents you from losing more money than you want to. The prices in this trading are also transparent, unlike other trading options where factors such as time can affect prices.

The major advantage of it is also its major disadvantage. Without leverage, the potential for profit is limited to your capital. Another demerit is that spot markets are easily affected by illiquidity. Without enough liquidity, you might be forced to sell at a loss.