Spot Trading constitutes a direct approach to operations and investments in the financial universe and in the cryptocurrency segment. For those taking their first steps in investing in crypto assets, trading on the spot market, which includes acquiring cryptocurrencies at the current market value with the aim of maintaining the position (HODLing), presents itself as a typical initial experience.

Such spot markets are available for a variety of assets, including cryptocurrencies, stocks, commodities, currencies and bonds, among others. It is likely that these market modalities and operations are already, at some level, familiar to the investor.

What is Spot Trading?

Essentially, Spot Trading can be defined as executing an order to buy an asset at a specified price.

The objective of traders who operate on the spot is to capitalize on the appreciation of acquired assets, waiting for their value to increase and then selling them on the spot market and making a profit. Alternatively, short selling represents another strategy for spot market operators, which consists of selling financial assets when a drop in their prices is anticipated, and later repurchasing them at a lower value.

The spot price refers to the current market value of an asset. Market orders allow you to buy or sell assets at the best spot price available on an exchange. However, it cannot be guaranteed that the market price will remain stable during transaction processing. It may happen that the available volume is insufficient to meet the order at the desired price. For example, if someone wants to purchase 10 ETH at the spot price but only three are available, they will need to complete the rest of the order at a different price.

Spot prices are dynamic, adjusting as orders are executed, and updated in real time. Spot trading on the over-the-counter (OTC) market operates differently, without an order book, allowing you to establish a fixed value and price with another party.

Delivery of assets can be immediate or take up to two business days after the trade date (T+2). In the past, transferring shares required physical certificates, and currency was moved via physical cash, bank transfer or deposit on cryptocurrency exchanges.

With current technologies, delivery has become instantaneous. On the other hand, cryptocurrency markets operate 24/XNUMX, facilitating almost immediate transactions. However, in peer-to-peer negotiations, often known as OTC, delivery times can be longer.

How does Spot Trading work?

Spot Trading in cryptocurrency trading refers to the immediate buying or selling of cryptos on the “spot market”. In this context, the term “spot” indicates that transactions are executed instantly or within a short period of time, based on current market prices. Here is an overview of how Spot Trading works in cryptocurrency trading:

Instant Buy and Sell

Investors and traders can buy or sell cryptocurrencies immediately using cryptocurrency exchange platforms. The buy or sell price is determined by the current market price of the cryptocurrency being traded.

Market Orders and Limit Orders

Market participants can use market orders to buy or sell cryptocurrencies at the current market price or use limit orders to set a specific price at which they are willing to buy or sell. Limit orders are only executed when the market reaches the set price.

Liquidity and Fast Execution

Spot Trading is characterized by its high liquidity, allowing large volumes of cryptocurrencies to be bought or sold quickly without causing large price fluctuations. Executing transactions quickly is crucial to taking advantage of market opportunities and minimizing the risk of loss due to price fluctuations.

No Leverage

Unlike Margin Trading, Spot Trading generally does not involve leverage. This means that traders only use available capital without taking additional loans to increase position size. As a result, the risk of magnified losses due to leverage is eliminated, although this also limits the potential for magnified profits.

Asset Custody

After executing a transaction on Spot Market, ownership of cryptocurrencies is transferred immediately. If a trader buys cryptocurrencies, they are added to his wallet on the exchange (or can be transferred to a personal wallet), and if he sells, the assets are removed from his wallet and the corresponding funds are credited.

Volatility and Strategy

While Spot Trading offers the opportunity to capitalize on market volatility, cryptocurrency market, it also requires traders to have a good entry and exit strategy, as well as a solid understanding of the market, to manage the risks associated with rapid price changes.

What is a Spot Market?

In the context of cryptocurrencies, a Spot Market refers to an platform, mostly provided by exchanges, that allows real-time trading between users. Orders are quickly executed and transactions are efficiently processed. It is possible to trade a wide variety of currencies on specific pairs, both cryptocurrencies (such as BTC, ETH, BNB) and fiat currencies.

These spot markets are made up of three fundamental elements: sellers, buyers and an order book.

There are two distinct formats of spot markets: the over-the-counter (OTC) market and intermediary exchanges. In the OTC market, transactions occur directly between seller and buyer, without the intermediation of brokers. In contrast, on intermediary exchanges, third-party companies act as mediators between sellers and buyers.

Advantages and Disadvantages of Spot Trading

Benefits

Price transparency is a notable advantage of Spot Trading, with values ​​determined solely by market supply and demand dynamics. This feature distinguishes it from the futures market, where the price can be influenced by a range of additional factors such as funding rates, price indexes and the moving average (MA) basis. In traditional markets, even interest rates can affect asset prices.

The simplicity of rules, rewards and risks makes participating in Spot Trading affordable. For example, when investing $500 in BNB in ​​the spot market, you can quickly assess the potential risk by considering the entry price and the current market value.

The “set it and forget it” strategy is viable, unlike derivatives and leverage transactions, where it is necessary to liquidate positions or meet margin calls. In Spot Trading, the operator has complete autonomy to decide when to enter and exit the market, without the need for constant monitoring, except in short-term strategies.

Disadvantages

The spot market can result in the possession of undesirable assets, depending on the object of negotiation. For example, purchasing crude oil requires physical delivery of the asset. In the context of cryptocurrencies, it is up to the holder of tokens and coins to ensure their protection and security. Trading futures derivatives offers an alternative to gaining exposure to these assets, with financial settlement.

For certain assets, individuals and corporations, stability is essential. Companies seeking international expansion, for example, need access to foreign currencies in the foreign exchange market, as exclusive dependence on the spot market can result in excessive volatility in budgets and profits.

Compared to futures or margin trading, Spot Trading can have more modest potential profits, as it allows you to trade larger positions using the same amount of capital.

 Exchanges vs. OTC

Spot Trading can be carried out both on specific platforms and directly between interested parties, without the intervention of intermediaries.

 Centralized Exchanges

Centralized exchanges manage the trading of assets such as cryptocurrencies, foreign currencies and commodities, acting as intermediaries between market participants and as custodians of traded assets. To operate on a centralized exchange, you must first deposit the money or cryptocurrency you wish to trade. Exchanges, in addition to ensuring the fluidity of transactions, must comply with regulations, Know Your Customer (KYC) processes, offer fair prices, security and consumer protection, charging fees on transactions and listings.

Decentralized Exchanges (DEXs)

Unlike centralized exchanges, DEXs use technology blockchain to facilitate the matching of buy and sell orders without the need to open an account or deposit assets in advance. Smart contracts enable the direct execution of trades in traders' wallets, offering greater privacy and autonomy. However, the absence of KYC procedures and customer support can open loopholes for fraudulent actions.

Platforms like Binance DEXs operate with an order book mechanism, while innovations like Pancake Swap and Uniswap, which utilize the Automated Market Maker (AMM) model, represent a distinct, liquidity pool-based approach to token trading, with transaction fees intended for providers of these funds.

OTC

Over-the-Counter (OTC) trading, or off-exchange trading, is characterized by the direct transaction of financial assets and securities between brokers, traders and dealers. In the OTC market, spot trading uses various means of communication, such as phone calls and instant messages, to organize transactions.

The absence of an order book in OTC trading offers significant advantages. When trading a low-liquidity asset such as small-cap cryptocurrencies, a large order can cause slippage. This occurs because the exchange may not be able to fulfill the order at the desired price, forcing the investor to accept higher prices to complete the transaction. Therefore, large-volume OTC transactions generally obtain more advantageous prices.

Differences between Spot Market and Future Markets

Spot Markets stand out for allowing fast transactions with almost immediate delivery of assets. In contrast, Future Markets involve the trading of contracts that will be settled at a future date. In this arrangement, the buyer and seller agree to transact a specific volume of assets at a determined price in the future.

On the contract's expiration date, settlement generally occurs in cash, without the need for physical delivery of the asset.

Differences between Spot Trading and Margin Trading

Although some spot markets offer the possibility of trading on margin (Margin Trading), these two modalities have fundamental differences. Spot trading implies the immediate purchase of the asset, with full delivery of the same.

On the other hand, margin trading allows the investor to take loans from third parties, paying interest on the amount, which allows them to operate with larger volumes of capital. This leverage can magnify potential gains. However, it is important to exercise caution, as increased risk could lead to the total loss of the initial investment.

Conclusion: What Is Spot Trading In Crypto Trading And How It Works

Spot Trading is a vital component of the cryptocurrency trading ecosystem, offering investors and traders a platform to place immediate or short-term transactions based on current market prices. Differentiating itself from other forms of trading such as Margin Trading or futures markets, Spot Trading appeals to those seeking immediate liquidity, fast execution and direct ownership of assets without the use of leverage.

This mode of trading allows market participants to capitalize on the intrinsic volatility of the cryptocurrency market, while also requiring a solid understanding of trading principles, a clear strategy, and effective risk management to navigate rapid price changes. Whether experienced traders looking to take advantage of short-term price movements or novice investors purchasing their first cryptocurrencies, Spot Trading represents a key entry point into engaging with the crypto market.

Through the use of market and limit orders, traders can exercise control over their operations, ensuring they buy or sell cryptocurrencies at prices that align with their investment objectives. The ability to transact directly and quickly makes Spot Trading a popular choice among market participants, highlighting its importance in facilitating an accessible, liquid and dynamic cryptocurrency market.