Spot trading in crypto – How does it work?

Spot trading is one of the most common crypto trading and investment strategies today. More often than not, beginner crypto investors start off their journey by trading with the spot market. Just like every other type of trading, spot trading in crypto could yield a profit or loss depending on the market.

This article discusses spot trading in crypto for beginners, getting into the nitty-gritty of how to trade spot markets, its benefits and associated risks. 

What is a spot market in crypto? 

Spot market refers to the base market where crypto assets are exchanged and settled instantaneously. Trading activities in spot markets involve buying crypto coins like Bitcoin or other altcoins and holding them until they rise in value. It is called spot trading because such transactions are settled on the spot. 

Essentially, in a spot market, sellers place an order with a specific asking price, while the buyers place an order for a specific cryptocurrency token with their respective bid process. The ask price is the lowest price that a seller is willing to accept while the bid price is the highest that a buyer is willing to pay.

The order book acts as a boundary between the buyer’s offer and the seller’s request. Essentially, it records asks and bids.

What is spot trading in crypto? 

Spot trading in crypto simply refers to the process through which traders purchase crypto assets and hold off for them to rise in value. Essentially, after the coin rises in value, the trader can go on to sell off and make a profit. 

Spot trading requires that you invest in crypto coins yourself, hence, you can only purchase the amount you can afford. This makes it regarded by many as a relatively safer crypto option than others. At worse, the crypto coin will drop in value to nothing and you lose the direct money you invested. Other strategies like leverage in crypto and margin trading could see you lose much more. You can also learn about top 5 forex trading strategies in our other post

What are the pros and cons of crypto spot trading?

The pros of crypto spot trading include: 

• You own the crypto asset you purchase during spot trading
• It allows you to use your cryptocurrency asset for other activities like staking or online payments
• Spot trading is less risky than other types of trading like margin trading and leverage

The cons of crypto spot trading include: 

• The major con of spot trading is that it does not offer a high-profit amplification that margin and leverage trading may provide.
• Potential profits in spot market trading are generally lower than in other types of trading.

What is the difference between spot trading and futures trading? 

The major difference between spot trading and futures trading is the fact that spot trades are conducted instantly while future trades are paid for at a later time. With future trading, payment is made that the buyer and seller agree to. Also, with spot trading, the investment strategy is to buy low and sell high, while with futures trading, it is to go long or short regarding time. You can also learn about FUD in crypto in our other article.

What is the difference between spot trading and margin trading? 

Compared to margin traders who borrow capital to purchase crypto, spot traders purchase assets with their own capital. This allows margin traders to purchase assets in larger quantities but compels them to meet certain requirements to avoid a margin call. 

What are the types of spot markets in crypto trading? 

The types of spot markets in crypto trading include: 

1. Crypto exchanges: 

this refers to traditional crypto exchange platforms where demand and supplies are met through buyers and sellers. Essentially, you can buy or sell assets quickly at immediate market prices. 

2. Over-the-counter (OTC) trading: 

Over-the-counter trading occurs when a buyer transacts with a seller directly without a crypto exchange or third-party platform. The two parties may transact at any price they wish, which may be higher or lower than the market value. 

Is spot trading in crypto profitable? 

Spot trading in crypto is profitable when applied smartly. Generally, traders in spot trading make purchases and wait for the next bull to profit. However, it is more long-term and you have to exercise a lot of patience.  It is also wise to conduct research on potential risks and recent market trends to prevent losses.

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