Since their inception, cryptocurrencies have experienced rapid growth and widespread market adoption, as evidenced by crypto-linked assets that have begun to appear in the portfolios and trading methods of numerous asset managers. The process of buying and selling cryptocurrencies to make a profit is known as cryptocurrency trading.

Cryptocurrency trading can be defined in terms of its objective, mode of operation, and trading approach. For example, the asset being traded, or cryptocurrency, is the target of cryptocurrency trading. The way cryptocurrencies are traded depends on the type of transaction such as futures, options, or perpetual contracts that are made on the market.

An investor’s trading strategy for cryptocurrencies specifies a set of predetermined guidelines for buying and selling on cryptocurrency exchanges. One of the basic trading methods for investing in cryptocurrencies is spot trading, in which traders buy assets in the hope of selling them at a higher price in the future.

Related: Cryptocurrency Investing: The Definitive Indicators For Cryptocurrency Trading

This article will discuss what is spot trading, cryptocurrency spot trading signals, how to do cryptocurrency spot trading, and what are the risks of cryptocurrency spot trading.

What is a crypto spot market?

The base market, where crypto assets are exchanged and settled instantly, is known as the spot market, and trading on this market includes buying digital currencies such as Bitcoin (BTC) or other altcoins and holding them until they increase in value.

Related: Spot Bitcoin ETFs vs. Futures: Key Differences Explained

It is called spot trading because transactions are settled “on the spot.” Also, spot markets include sellers, buyers, and order books. Sellers place an order with a specific bid or ask price, and buyers place an order for any cryptocurrency token with a particular bid or bid price. The offer price is the highest price a buyer is willing to pay and the ask price is the lowest price a seller is willing to accept as payment.

The order book has two sides: the demand side for buyers willing to buy and the supply side for sellers willing to sell. The order book records the offers and requests in the order book. For example, in spot trading, if Bob places an order to buy BTC, this transaction will instantly go next to the bid side of the order book. When a seller on the cryptocurrency spot trading platform sells with the same specifications, this order is automatically filled.

The transaction continues on the demand side of the order book when Bob enters an order to sell BTC in the cryptocurrency spot trading example above. Orders in green in the order book reflect buyers of a specific token, while orders in red represent sellers of that token.

What is cryptocurrency spot trading?

The goal of spot trading is to buy low and sell high to make a profit, but it is not certain that this tactic will always work to the advantage of traders considering the volatility of the crypto market.

Spot price, trade date, and settlement date are the three crucial concepts in spot trading. The current price of any asset is called the spot price, and traders can sell the assets under consideration immediately at this price. Also, one can buy or sell cryptocurrency with other users on various exchange platforms.

The spot price changes as new orders are placed and old ones are filled. The trade date initiates and records the transaction and represents the day the market actually carries out the transaction. The assets involved in the transaction are transferred on the settlement date, also known as the spot date.

Depending on the type of market in which it is traded, there may be one or more days between the trade date and the settlement date. For cryptocurrencies, it usually happens on the same day, although it can differ between exchanges or trading platforms.

How does cryptocurrency spot trading work?

A market order on an exchange allows traders to buy or sell assets at the best available spot price. A spot market typically offers a variety of currencies, including BTC, Ether (ETH), BNB (BNB), and even fiat. There are numerous methods for buying and selling currencies on many cryptocurrency exchanges, and spot traders often use a variety of fundamental and technical analysis approaches to make trading decisions.

One can spot trading on centralized exchanges, decentralized exchanges (DEXs), or over-the-counter (OTC) markets. You must first fund your account with the cryptocurrency you want to trade to use a centralized exchange. On centralized exchanges, fees are often applied to listings, exchanges, and other trading activities.

DEXs use Blockchain technology to match buy and sell orders, and cryptocurrency spot trading strategies can be done directly from a trader’s wallet thanks to smart contracts. Trading can happen directly on OTC platforms, through brokers executing trades on behalf of their clients, or even over the phone in the internet age.

Pros and cons of cryptocurrency spot trading

When you buy an asset at the spot price, you actually become the owner of the asset, allowing traders to sell it or relocate it to offline storage as they wish. Additionally, spot trading allows merchants to use their cryptocurrency assets for additional features like online payments or betting.

Additionally, spot trading is substantially less risky than margin trading, meaning one can invest in crypto assets without worrying about losing money due to price changes and dealing with margin calls. As a result, the trader does not risk putting up more of his own money or losing more money than he already has in his account because there are no margin calls.

However, the biggest drawback to spot trading is that it does not offer the advantage of any potential performance amplification that leverage in margin trading could provide. Also, due to the absence of leverage, the potential profits in the spot market are less than those of margin trading.

How to detect cryptocurrency trading on Binance?

Once you have created a Binance account, spot trading on the platform is a straightforward procedure. Crypto spot trading fees on Binance for BTC and BUSD spot trading pairs are 0%. The steps to detect operations on Binance are as follows:

On the Binance site, select “Trade” and then “Spot” to access the spot trading platform. The trade view interface, which has some interesting elements, will now be visible to you. The cryptocurrency trading pair and other market data such as daily price change and volume are displayed at the top. All open buy and sell orders for an asset are listed in the order book, sorted by price. Historical price data can be customized on this chart view. TradingView, already included in the window, provides access to a wide range of technical analysis tools. One can search for different trading pairs in the upper right corner. By clicking on the tiny stars, one can save their favorite cryptocurrency pairs and select the cryptocurrency pair they want to trade on the spot market. The buy or sell order for one will be created in this section. They can select from several order types: limit, market, and stop limit orders to make a spot trading transaction.

Spot Trading vs. Futures Trading

As mentioned, spot trades are done instantly for immediate delivery. However, contracts in the futures market are paid at a later time when a buyer and seller agree to exchange a specified number of items for that price. The buyer and seller often reach a financial agreement rather than deliver the asset after the contract expires on the settlement date.

The differences between these two types of trade are listed in the table below:

Spot Trading vs. Margin Trading

Day traders open short-term trades with low spreads and no expiration date in spot trading to get quick delivery of the underlying asset. The difference between the quoted bid (buy) and bid (sell) prices for an asset is known as the spread in trading.

On the other hand, margin trading allows traders to take larger positions by borrowing money from a third party at interest to potentially make significant profits. However, it is essential to be careful not to lose all of your initial investment because it also magnifies any potential loss.

The differences between spot and margin trading are summarized in the table below:

Is cryptocurrency spot trading profitable?

Traders generally apply a dollar cost averaging strategy and wait for the next bull market to profit from spot trading. However, rewards come at the cost of patience, and nothing is instant in the volatile cryptocurrency market. Also, before trading any crypto asset or using spot trading strategies, it is advisable to perform due diligence and exercise risk management to avoid suffering losses. But is cryptocurrency spot trading good for beginners?

Every investor has a different risk-return profile, and given the highly volatile cryptocurrency market, one must weigh the pros and cons of the trading strategy (in this case, spot trading) of their choice. This means that traders must be careful when deciding which assets to trade and must be well versed in the market before starting.



This post What is cryptocurrency spot trading and how does it work?

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