What is Spot Trading in Crypto? – Trading Fuel
- Spot trading is generally available in the cryptocurrency market.
- Spot trading in crypto is the entire process of buying and selling crypto-currencies at real-time prices with the aim of generating a trading profit.
- In this type of trading, a trader will intend to gain profit from the market fluctuations by trading their tokens.
What is spot trading in crypto-currency?
- It is the process of buying and selling crypto-currencies at real-time prices with the general aim of generating a trading profit.
- This is completely different from investing in cryptocurrency.
- Crypto-currencies will involve holding an asset for a medium or long-term period.
- Whereas, the spot traders will basically buy as well as sell the crypto-currencies in an attempt to generate regular short-term profits.
- When you are into spot trading, you will take actual ownership of the crypto-currencies you buy and then give up the ownership of the crypto-currencies you will sell.
Spot trading in crypto-currencies:
- For crypto-currency traders, spot trading is considered to be very popular.
- Several crypto agencies will provide you with various options to buy as well as sell coins whenever you want.
- The coins that have got high liquidity will have a higher trading volume on popular exchanges than the others.
- If you are a crypto trader, you will have to be familiar with all the patterns and techniques that are used by spot traders.
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Examples of spot trading:
- There are several examples of spot trading that can be found in both conventional and crypto markets.
- For example, when you purchase gold at the spot price with the mere hope that it will rise in the near future.
- If the gold price actually rises within the next few months, you will be able to make huge profits, and if it decreases, you will bear a loss.
- The same is the case with the cryptocurrency market.
- If you buy the crypto coin right now at the spot price and then hold it for the next few months, you will be able to either make huge profits or bear a loss.
What is a spot market?
- A spot market will allow traders to buy and then sell an asset at the prevailing market rates.
- In the spot market, transactions are settled on the “spot” immediately after the order of both the buyer and seller is fulfilled.
A spot market will basically include the following:
- Here, you will have to decide to trade different crypto-currencies in specific pairs of your own choice in the entire crypto spot market.
- The crypto spot market is subject to several fluctuations that are reflections of market sentiments by the traders.
- These market sentiments are finally driven by several factors that will also push the traders to buy as well as sell.
- Spot traders will be taking the help of fundamental analysis as well as technical analysis techniques to make their trading decisions.
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Where can you trade the crypto spot market?
Crypto spot markets are available in various ways.
They are as follows:
Centralized exchanges (CEXs):
- This exchange is very much like the traditional stock exchange and online brokers.
- Here, CEXs will conduct large-scale crypto-currency transactions by using the order book model to match the buyers and sellers.
- CEXs will also provide custody services after allowing you to deposit and then store your crypto assets on their own platform.
- With the help of this exchange, you will also be able to enjoy higher liquidity on your preferred asset, fast trading times, customer protection, and security.
- CEXs will charge users transaction fees on each trade they make in order to provide these services.
- Through this, exchanges can make a profit in both bull and bear markets, through which they will have enough users and trading volumes to cover their costs.
Decentralized exchanges (DEXs):
- DEXs are the platforms that will allow you to access the spot crypto currency market without the help of brokers and intermediaries.
- Here, the users will typically trade against the liquidity in the type of smart contract that is also referred to as an automated market maker (AMM).
- Users will trade crypto-currencies directly from their own wallets without surrendering custody of their assets.
- With the help of this exchange, you will be able to access the spot market without surrendering your privacy or negating the counterparty risks.
- Here, in DEXs, the trading fees are generally cheaper.
- But when the block-chain network becomes congested, transaction fees will skyrocket.
- DEXs have low liquidity and are not as simple to use as their own centralised counterparts.
- OTC spot trading will take place between two parties that are completely outside of crypto exchanges.
- Dealers or brokers will act as the market makers after they quote different prices at which they will buy or sell a crypto-currency.
- OTC trading can often become cheaper than exchange trading, and also, the price of trading is not necessarily disclosed to the third parties.
- These spot markets are usually private and less regulated than the exchange landscape itself.
- Also, they will allow the traders to buy and sell large amounts of crypto without moving the market price too much.
Benefits of spot trading in crypto:
Spot trading offers many benefits to both buyers and sellers.
They are as follows:
- Spot trading will provide you with a negotiation facility. Here, both the buyers and sellers can negotiate the price so as to benefit themselves.
This negotiation process will offer a fair and equal advantage that will make it one of the most lucrative markets in the crypto-currency trading.
- In the spot market, crypto tokens can easily be traded against each other, which will allow the traders to make instant transactions.
- Spot trading will facilitate the purchase of tokens at low rates so as to sell them at higher prices, which will also ensure a balanced profit-making process.
- There is the prospect of generating a high profit in spot trading because it will allow traders to buy as well as sell coins simultaneously.
- Spot trading will involve on-the-spot dealings, and hence it will ensure transparency.
- There is no entry barrier in the spot market, and hence traders with small investments can also take advantage of the high volatility of prices.
- The spot market has its gates open to day trading, where you will be able to buy and then sell your crypto tokens rapidly to make small profits.
Risks of spot trading in crypto:
Crypto trading has also got its own risks.
They are as follows:
Difference between spot trading and margin trading:
- The major difference between spot trading and margin trading in crypto-currency is the concept of risk versus reward.
- The crypto market is considered to be far more risky than trading stocks, bonds, currencies, commodities, and other markets.
- In comparison, even Bitcoin is considered volatile because its prices can rise or fall by 10% in a single day, which is not uncommon.
- In spot trading, once you buy or sell, the deal is entirely done, and you own what you own.
- Margin trading, in contrast, is far more complex and risky.
- Potential rewards in margin trading are higher than those in spot trading.
- The scale of risk and reward in margin trading in crypto is usually between 2 and 100 times.
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We hope that the above blog has given you clarity about spot trading in crypto-currency.
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