A spot market in cryptocurrency is like an online platform on exchanges from where you can involve in real-time crypto trading with others. The transactions are settled efficiently whereas the orders are filled in real-time. If you are a buyer, you will be allowed to deal in multiple cryptocurrencies such as ETH, BTC or FIAT. Almost every crypto exchange has three aspects including buyers, sellers and order book.
Traditional crypto spot markets for spot trading exist in several forms like third-party exchanges and over-the-counter trades. The over-the-trade counters usually have sellers and buyers only without any interference from brokers. In a third-party exchange, the exchange acts as a broker or intermediary between the buyer and seller. Read below to know more about the spot market and spot trade in crypto realm.
What is spot trading?
Spot trading in cryptocurrency is a continuous process where tokens are bought and sold at the spot price for immediate order settlement. The trader seeks to gain profit due to the volatile market and price fluctuations in specific coins. They trade their desired tokens in the spot market within the lower timeframe and earn more profits through small but several trades. When you become a spot trader, you do not need to hold tokens for long period but rather turn them into profits by selling them the same day. You can try paper trading available in many exchanges which will help you understand how to spot trading works in real-time.
Benefits of spot trading
- Spot trading offers spot traders the negotiation facility where buyers and sellers can negotiate the price difference to benefit themselves. The negotiation procedure provides both buyers and sellers with an equal and fair advantage that makes spot trading a lucrative tool in cryptocurrency trading.
- In spot trading, profit generation is comparatively higher as it allows buyers and sellers to employ trading simultaneously.
- With spot trading, traders can buy or sell tokens immediately and make huge profits in a volatile market.
- Since spot traders meet at spot-dealing locations, transparency is ensured.
- Traders with a small investment can also earn during price fluctuations in the spot market which has nearly no barrier to entry.
- In spot markets, the tokens can be traded against one another including FIAT which allows traders to involve in quick transactions.
Key aspects of spot trading in crypto
Before you start trading in any crypto exchange, always keep in mind that they charge a transaction fee for every order. The fees may depend on the size of the order and whether you are a taker or maker. While the makers in the spot market are those who provide liquidity by increasing the market depth of the order book, takers are the ones who remove them. This means, that if you put in a market like a buyer, you will be regarded as a taker. Some key components which you will find in most of the crypto exchanges includes:
Market order: it is when you remove liquidity from the order book at the greatest price instantly obtainable. According to real-time executions, when you execute a market order, you ought to receive a notification immediately letting you know that it was successful. The remaining portion of your order will be cancelled if it can’t be filled in full right away. A limit order’s execution is not assured because the seller’s acceptance of your asking price is crucial.
Limit order: the second aspect is a limit order added to your order book. When the seller agrees to sell the desired asset at an agreed price to you for buying, the order is completed thereafter.
Conditional order: this market order is filled at a spot once the triggered price meets the last traded price. The trade is immediately executed when the conditional limit order is received by your order book.
Order history: This enables traders to know the type of orders made during a specific period. Order history helps traders in keeping a record of every executed or cancelled order for future reference.
What is the difference between spot trading and futures trading in cryptocurrency?
Spot trading and futures trading in crypto is very different from one another. When you involve in spot trading, the transaction takes place instantly however, in future trading, time is needed since both the involved parties must agree to a common price. The transaction is deemed completed only after the price is agreed upon and the contract is locked. After the contract is matured on a pre-determined date, the seller and buyer come to a settlement.
Two things that effects profits in both the trading is the asset’s volatile nature and market sentiment in real-time. Fluctuations in spot prices occur based on the asset’s volatility and the market sentiment in real-time. While trading futures contracts, both sides should indeed concur on a price, therefore the predicted value is dependent on several different variables and is not necessarily influenced by the asset’s volatility. The delivery date for the two alternatives also varies significantly. Spot trading often happens right away, although futures deals might be completed months after the initial purchase.
Where can you start spot trading in cryptocurrency?
Over-the-Counter or Peer-to-Peer trading
Spot trading is best done through over-the-counter trading spots as they have many advantages. Over-the-counter trading is regarded as off-exchange and takes place between buyers and sellers directly. A market dealer or a broker facilitates the trade with the coin buyers until the transaction is completed successfully. As compared to spot trading in crypto exchanges, over-the-counter trading may have to struggle a bit due to filling orders as they may have insufficient demands from the buyers or face inability due to lack of order book displays.
Peer-to-peer exchange also facilitates crypto buying and selling but uses a barter system. The buyer is asked to join the P2P platform to input the trade preference. They can filter the required criteria to get their assets exchanged with the others. Every exchange offer is unique in terms of limits, price or payment methods which means, the buyer can choose the offer as per trading preference. Once the seller and the buyer agree to an offer, the transaction is processed. It is perceived that over-the-counter trading allows larger transactions as compared to peer-to-peer trading along with more anonymity.
These exchanges act as an intermediary between buyers and sellers. The spot trading exchange is like a custodian for traded assets as they allow spot traders to have an access to fiat trading pairs to buy or sell through their platform. But centralised exchanges must provide traders with security and anti-money laundering facilities. In return for such services, they charge a transaction fee irrespective of bearish or bullish market trends.
A decentralised exchange or DEX offers comparable services to the one mentioned above, but it connects buyers and vendors directly. A decentralised exchange is designed to ensure that traders do not have to put their faith in a middleman in order to execute a transaction. The blockchain technology used by DEX promotes those transactions that may be executed straight from a trader’s wallet by following pre-established guidelines in smart contracts. Because smart contracts are self-executing, trades may be carried out according to specific regulations and in the privacy of users. Following a decentralised transaction, the money is transferred to your account as opposed to being left in the care of a centralised organisation.