In recent years, the world of cryptocurrency has witnessed a remarkable transformation. The once niche digital coins have now taken centre stage, thanks to the increasing interest from institutional investors. This surge in attention has sent shockwaves through financial markets, making it more crucial than ever to grasp the fundamentals of cryptocurrency trading.
Cryptocurrency trading involves buying and selling digital currencies online from exchanges or brokers. It involves speculating the price movements of various coins and tokens based on supply and demand, market sentiment, news events, technical analysis, and other factors.
Such trading events have been divided into margin, futures, options, and spot trading. Each class has advantages and disadvantages, depending on the trader’s goals, preferences, and risk appetite. This blog aims to demystify the process of crypto spot trading and why traders and investors prefer it. So, let’s begin!
What Is Spot Trading Crypto?
Let’s begin by understanding the answer to the question, “What is spot trading in crypto?”
Crypto spot trading involves the buying and selling of cryptocurrency assets at their current market prices for immediate delivery. This means that the buyer takes ownership of the cryptocurrency as soon as the trade is executed, and the seller immediately delivers the cryptocurrency to the buyer’s wallet.
In spot trading, a delivery commitment is established between the buyer and the seller. Simply put, when a buyer and seller agree to a spot trade, they are legally committed to completing it. The buyer must pay the seller the agreed-upon price in fiat currency or another cryptocurrency, and the seller must deliver the cryptocurrency to the buyer’s wallet.
Spot trading is typically used to generate short-term profits. Traders buy cryptocurrencies when they believe the price will go up and sell cryptocurrencies when they think the price will go down.
Other than this, spot trading in crypto is popular amongst traders and investors due to the following reasons:
- Low spreads: Spot trading typically has lower spreads than other types of cryptocurrency trading, such as margin trading. Spot traders don’t use leverage, which can amplify profits and losses.
- No expiration date: Spot orders do not have an expiration date, meaning traders can hold their position for as long as they want. This contrasts futures contracts, which have a specific expiration date.
Details On Spot Trading Crypto
To understand the concept of spot trading crypto, a few related terms must accompany you.
1. What Is Spot Price?
The spot price is the present market rate for a crypto asset’s immediate purchase or sale. It is the price at which a buyer is willing to buy and a seller is willing to sell the crypto tokens or asset at a specific time and place.
These prices are determined by supply and demand. The spot price will increase if any crypto token has more demand than supply in the market. Conversely, the spot price will decrease if a crypto has more supply than demand in the crypto market.
These prices are important because they allow traders and investors to decide when to buy and sell assets. For example, a trader might buy a token if they believe the spot price is below its intrinsic value. Contrarily, a trader might sell crypto if the spot price exceeds its intrinsic value, churning a profit.
2. Crypto Spot Trading Pairs
The second most important thing to consider is the crypto spot trading pairs. Crypto spot trading pairs are combinations of two cryptocurrencies or a cryptocurrency and a fiat currency that can be exchanged at a specific price on a crypto exchange.
There are two main types of crypto spot trading pairs:
- Crypto-to-Fiat Pairs: These pairs allow you to trade cryptocurrencies for fiat currencies, such as the US dollar (USD) or the euro (EUR). For example, BTC/USD and ETH/EUR are crypto-to-fiat pairs.
- Crypto-to-Crypto Pairs: These pairs allow you to trade cryptocurrencies for other cryptocurrencies. For example, BTC/ETH and LTC/USDT are crypto-to-crypto pairs.
Spot trading pairs are essential because they allow you to speculate on the price of one cryptocurrency relative to another. For example, if you believe Bitcoin will increase in value relative to Tether, you can buy the BTC/USDT trading pair. If Bitcoin does increase in value, you will make a profit.
3. Order Book
An order book is a real-time electronic list of buy and sell orders for a selected cryptocurrency. It displays the buy and sell orders, also known as bids and asks, of all traders on a cryptocurrency exchange. Moreover, the order book is constantly updated as new and existing orders are placed.
The book is divided into two sides, i.e., the buy-side (bids) and the sell-side (asks). The buy-side lists all traders willing to buy a cryptocurrency at a specific price. The sell-side lists all traders ready to sell a cryptocurrency at a particular price.
An order book shows a particular token’s open orders and market depth. Open orders are orders that have not yet been filled. Market depth is the total amount of cryptocurrency available to buy or sell at each price level.
It is an essential tool as it provides information about the supply and demand for a cryptocurrency. You can use this information to decide when to buy and sell cryptocurrencies.
4. Different Kinds of Orders
Spot trading is also affected by the orders the investor or the trader places. You can use either of the below orders in spot trading:
a. Limit Order
A limit order is an order to buy or sell a cryptocurrency at a specific price or trade a cryptocurrency at a particular price or better and are willing to wait for their order to be filled.
To place a limit order, you need to specify the price at which you want to buy or sell the cryptocurrency and the number of cryptocurrencies you want to buy or sell. Your order will be placed in the order book at the specified price and filled when a counterparty is willing to trade at your price.
b. Market Order
On the contrary, a market order is an order to buy or sell a cryptocurrency at the best available price. Market orders are typically used by traders who want to buy or sell a cryptocurrency immediately, regardless of the cost.
To place a market order, you need to specify the amount of cryptocurrency that you want to buy or sell. Your order will be placed in the order book and filled at the best available price.
5. Maker And Taker Fees
Maker and taker fees are two types of trading fees that are charged by cryptocurrency exchanges. Maker fees are charged to traders who place limit orders, while taker fees are charged to traders who place market orders.
Maker fees are typically lower than taker fees, as exchanges want to incentivise traders to place limit orders and provide liquidity to the market. Taker fees are typically higher than maker fees, as exchanges wish to prevent traders from putting market orders, thereby removing liquidity.
Differences Between Spot & Margin Trading
The main difference between spot and margin trading is that spot trading involves buying and selling cryptocurrencies at the current market price with your capital. In contrast, margin trading allows you to borrow funds from a broker to trade more prominent positions.
Spot Trading
Spot trading is the simplest form of cryptocurrency trading. When you spot trade, you buy or sell a cryptocurrency at the current market price and take immediate delivery. This means you must have the total capital required to purchase the cryptocurrency to place a spot trade.
Margin Trading
Margin trading is a more complex form of cryptocurrency trading that allows you to borrow funds from a broker to trade more prominent positions. This means that you can control a larger position with less capital, but it also means that you are taking on more risk.
If you believe that the price of a cryptocurrency will increase, you can use margin trading to buy more of the cryptocurrency than you would be able to buy with your capital. This can amplify your profits if the price of the cryptocurrency does increase. However, it can also amplify your losses if the cryptocurrency price decreases.
Here is a table that summarises the key differences between spot trading and margin trading:
Characteristic | Spot Trading | Margin Trading |
Capital required | The total amount of capital required to purchase the cryptocurrency | Less capital is required, as you can borrow funds from a broker |
Position size | Smaller positions | Larger positions |
Risk | Lower risk | Higher risk |
Potential profits | Lower potential profits | Higher potential profits |
Which Type Of Trading Is Right For You?
Spot trading is an excellent place to start if you are new to cryptocurrency trading. It is a more straightforward form of trading and less risky than margin trading.
However, if you have experience with cryptocurrency trading and you are comfortable with taking on more risk, margin trading can be a way to amplify your profits. Doing your research and understanding the risks before starting margin trading is essential.
Differences Between Spot & Futures Trading
Spot and futures trading are two different ways to trade cryptocurrencies. Spot trading is the buying and selling of cryptocurrencies at the current market price for immediate delivery. Futures trading is the buying and selling of contracts to trade a cryptocurrency at a specific price on a future date.
Spot Trading
Spot trading is the buying and selling of cryptocurrencies at the current market price for immediate delivery. When you spot trade, you buy, sell, and own a cryptocurrency directly. It is a good option for traders who want to buy and sell cryptocurrencies immediately and do not want to take on the risk of leverage.
Futures Trading
On the other hand, futures trading is buying and selling contracts to buy or sell a cryptocurrency at a specific price on a future date. These contracts are standardised, meaning they all have the same contract size and expiration date.
Futures traders can use leverage to control larger positions with less capital. However, leverage also amplifies both profits and losses. It is a more complex form of trading than spot trading and even riskier. However, it can also be a way to generate higher profits.
This table summarises the crucial distinctions between spot trading and futures trading:
Characteristic | Spot Trading | Futures Trading |
Delivery | Immediate delivery | Delivery on a future date |
Ownership | Take immediate ownership of cryptocurrency | Do not take ownership of cryptocurrency until the contract expires |
Leverage | Cannot use leverage | Can use leverage to control larger positions with less capital |
Risk | Lower risk | Higher risk |
Potential profits | Lower potential profits | Higher potential profits |
Which Type Of Trading Is Right For You?
Starting with spot trading is ideal for newcomers to cryptocurrency markets due to its simplicity and lower risk profile. On the other hand, futures trading can magnify profits for those seasoned in cryptocurrency trading and willing to embrace higher risk.
Cryptocurrency Spot Markets
Cryptocurrency spot markets are markets where cryptocurrencies are bought and sold at the current market price for immediate delivery. This means that when you buy a cryptocurrency on a spot market, you immediately take ownership of it.
Types of Spot Markets
A. Exchanges
Cryptocurrency exchanges are online platforms or marketplaces where you can buy, sell, and trade various cryptocurrencies. Below explained are two types of crypto exchanges available in the market:
Centralised Exchange (CEX)
Centralised exchanges (CEXs) are the most common type of cryptocurrency spot market. They are online platforms that allow users to buy, sell, and trade cryptocurrencies.
CEXs act as intermediaries between traders and cryptocurrencies, and they are responsible for matching buyers and sellers, holding users’ funds, and processing trades. Some of the most recognised CEXs are Binance, Coinbase, Kraken and OKX.
Decentralised Exchange (DEX)
Decentralised exchanges (DEXs) are a newer type of cryptocurrency spot market. It is a cryptocurrency exchange that a single company does not operate. DEXs are peer-to-peer platforms that allow users to trade cryptocurrencies directly with each other without the need for a third party.
They are typically powered by smart contracts, which are self-executing contracts that are stored on a blockchain. Some of the most popular DEXs are Uniswap, Pancakeswap and 1inch.
B. Over-the-counter (OTC) Trading
The second type of spot market is the OTC trading. Over-the-counter trading is a type of trading that takes place directly between two parties without the use of a centralised exchange. The buyer and seller agree on the price and terms of the trade directly with each other.
Due to its direct nature of trading, this can have several benefits, including:
- Reduced Slippage: Slippage is the difference between the expected price of a trade and the price at which it is executed. In OTC trading, the buyer and seller can agree on a price before the trade is executed, which can help to reduce slippage.
- Lower Market Volatility: OTC markets are typically less volatile than exchange-traded markets. It is because OTC trades are not executed on a public order book, which can help reduce the impact of large orders on the market price.
How To Profit From Spot Trading?
Spot trading can be profitable in the cryptocurrency market but requires a strategic mindset. Here are some key methods to potentially profit from spot trading:
Holding Tokens For The Long-Term
One way to profit from spot trading is by adopting a long-term investment strategy. In this approach, you purchase cryptocurrencies and hold onto them, expecting their value to increase. This method is often called “HODLing” in the cryptocurrency community.
To profit from this strategy, you must choose the crypto assets you believe have a strong future. Once you select your asset, you must buy and hold the tokens long-term. It is essential to be patient and not to sell your tokens in the short term, even if the market is volatile.
However, conducting thorough research and due diligence is important to choosing crypto assets with solid potential.
Dollar-Cost Averaging (DCA) Strategy:
DCA is a method where you invest a fixed amount of money at regular intervals (e.g., weekly or monthly) into a specific cryptocurrency, regardless of its price. This approach minimises the impact of price volatility on your investment.
With DCA, you buy more cryptocurrency when prices are low and less when prices are high. Over time, this strategy can help you accumulate a more prominent position at a lower average cost. It’s a prudent way to manage risk and steadily build your crypto holdings.
Realising Profits by Converting to Fiat or Stablecoins:
Once you have made a profit from your spot trades, you need to decide how you want to realise your gains. Spot trading allows you to convert your cryptocurrencies into fiat currency (e.g., US dollars, Euros) or stablecoins (e.g., USDT, USDC) when you believe it’s an opportune time to secure profits or reduce risk.
This can be particularly useful during periods of extreme market volatility, where you can protect your gains by converting to a more stable asset. It also offers liquidity, enabling you to access your funds easily for various purposes, such as spending or reinvesting when market conditions are favourable.
Conclusion
Spot trading is a great way to get started in the cryptocurrency market. It is relatively simple to understand, and many resources are available to help you get started. However, spot trading can be a risky activity since the cryptocurrency market is volatile, and prices can change rapidly. Researching and understanding the risks involved before you start spot trading is essential.
Moreover, it is also essential to be aware of the tax implications of spot trading. In many countries, capital gains taxes are applied to cryptocurrency trading profits, and manually computing such taxes can be challenging. You can use KoinX, an automated crypto tax calculating software that presents accurate tax reports based on location. So why wait? Join KoiX today and make your crypto tax easier.
