What Is Spot Trading in Crypto?
|— Spot trading is the process of buying a specific asset at the immediate market price, rather than opting to buy or sell an asset at the moment it hits a specific price.|
— There are three primary ways to spot trade crypto assets: centralized exchanges, decentralized exchanges, and over-the-counter trades.
— In contrast to other trading strategies like leverage trading and derivatives, the risks are lower in spot trading, but so are the rewards.
Just like trading in traditional financial markets, cryptocurrency trading comes in many shapes and forms; and some are more risky than others. When entering the wonderful world of web3, it may be tempting to jump into complex trading strategies, utilizing trading bots or getting involved in swing or leverage trading.
But starting your crypto journey doesn’t need to be that complicated. In fact, before you’re comfortable competing with the professionals, who do use such strategies, you might want to consider something simpler, such DCAing and HODLing.
If that sounds new to you—you’re in the right place. This article will explore a great way to get involved with crypto: Simply buying it at the immediate market price. In both crypto and traditional finance markets, this is called a spot order. And essentially spot orders allow you to start amassing assets, without overcomplicating anything.
However, like all crypto trading strategies, spot trading has advantages and disadvantages; what are they? And what is spot trading in crypto in the first place?
Let’s dive in.
Spot Orders in Crypto: What Are They?
Spot orders in crypto refer to buying a cryptocurrency using fiat or other crypto assets at the spot price, also known as the real-time market price. The reason it’s called spot trading is that the trade executes “on the spot.”
Generally, spot orders are for those who want to do one of the following things;
1. Holding (HODL )the assets for potential long-term profits.
2. Buying and selling assets on a spot exchange regularly, aiming to generate short to mid-term returns.
What is Spot Trading?
As mentioned, some users buy cryptocurrencies at the spot price to sell them later. Of course, the aim is to sell them at a higher price to complete the trade with a profit. And that’s exactly what spot trading is. But remember—buying speculative assets is always risky. Although many cryptocurrencies have amassed value over time, not all have fared so well. Thus, make sure you do your research before throwing all of your savings into your favorite coin.
How Does Spot Trading Work in Crypto?
So now you know what spot trading is, what about how it works?
The basis of spot trading is simple: buy low and sell high. This translates to users buying crypto assets at a lower price and selling them at a higher price. But this brings up a question: what’s the difference between spot trading crypto and regular crypto investing?
Well, the only difference is that in spot trading, you realize your profit. Put simply, you have to sell to complete the trade.
Apart from that, you can spot trade on all sorts of different platforms. Buying a crypto asset at its spot price uis possible using a centralized exchange (CEX), a decentralized exchange (DEX), or an over-the-counter (OTC) trade dealer.
However, the trade mechanism for each of these differs largely. While CEXs rely on orderbook models, DEXs use smart contracts and automated market makers (AMMs).
OTC trades on the other hand rely on trade dealers instead of a software solution.
Once you’ve bought your assets, you can choose any of these mediums to sell them at a higher price and realize your gains (assuming your asset’s price increased). To learn more about the differences between crypto exchanges, check out the full article comparing a DEX Vs a CEX.
Benefits of Crypto Spot Trading
Now you know all about the premise of what spot trading is and how it works in the cryptocurrency industry, let’s explore some of its advantages.
Spot orders don’t involve any complicated wallets, platforms or tools. All you need to do is buy the asset at the price it is right now—that’s it! Plus, its simplicity means buying at the spot price is perfect for combining with other great strategies, such as HODLing and DCAing.
To explain, “HODLing” is the process of holding cryptocurrencies long-term in the hope they increase in value. Obviously, this is not guaranteed, but for blockchains with active use cases and strong communities, simply holding cryptocurrencies over a few years can be the best option. You can even track these holdings very effectively using a strategy called dollar cost averaging (DCA). For the full details, check out the article on what Dollar-cost averaging is, but essentially the strategy involves buying a cryptocurrency periodically for the same value of fiat currency each time, no matter the current spot price.
Another key advantage of spot orders is their accessibility. To explain, spot orders are possible on multiple platforms and are available in almost every country in the world. This makes crypto spot trading incredibly accessible for everyone.
Less risk than many other crypto trading strategies
Before you get carried away, it’s important to note trading always comes with some risks. However, when you compare spot trading with leverage trading, the former comes with the lowest relative risk. That’s because leverage trading involves taking out loans, which could put your assets at risk. On the other hand, spot trading just involves buying and selling an asset at its immediate price. Arguably, it’s also lower risk than crypto futures trading too, as the market is so speculative that buying a cryptocurrency without knowing what the market could do is also a risk.
Risks of Crypto Spot Trading
Cryptocurrencies are invariably volatile and crypto trading also comes with its fair share of risks ranging from exchanges’ bank runs to hacks and attacks.
Crypto markets are highly volatile. Anyone spot trading cryptocurrencies must be extremely careful of this to avoid losing a major chunk of their capital to price fluctuations.
Liquidity can become a concern for spot trading during bear markets. If the liquidity of an asset dries out, traders may be unable to sell their asset or face high slippage during trades.
The price of your assets is not the only concern when spot trading. The platform you choose can also be a major security factor.
For instance, historically, many centralized crypto exchanges have gone bankrupt. As a result, users of those platforms were unable to withdraw their funds. So, if you choose a centralized platform, make sure to do your due diligence.
As an alternative, decentralized exchanges (DEXs) allow for self-custody, meaning you keep ownership of your assets. However, for most beginners, DEXs may seem less user-friendly as compared to their centralized counterparts.
Spot Trading vs. Leverage Trading: What’s the Difference?
Margin or leverage trading is a trading method that lets traders borrow funds from a broker or exchange, increasing their buying power and allowing them to engage in larger trades. It amplifies potential gains or losses by leveraging the deposited collateral.
In comparison, you can only spot trade with the amount you currently own in your wallet. So, your chance of relative returns is lower, but so is the risk.
Here’s an overview of the differences between spot and leverage trading.
Crypto Spot Trading vs. Derivatives
Crypto derivatives or contracts for differences (CFDs) are financial contracts or instruments that derive their value from underlying cryptocurrencies. These derivatives allow traders and investors to speculate on the price movements of cryptocurrencies without actually owning the underlying assets. Derivatives traders essentially place a wager on the value of a crypto asset going up or down; called crypto futures or options.
To explain, trading crypto futures involves buying or selling cryptocurrencies at a fixed date in the future, no matter the price of that asset at the time. For example, you might put a buy order in for BTC in a month’s time. In that case, you are forced to buy that BTC irrespective of whether the price has increased or decreased.
This differs from spot trading in a few key ways:
When you buy an asset from a spot market, assuming you hold the asset in a non-custodial wallet, you actually own the asset. When trading derivatives, however, you only own a digital representation of the actual asset.
Time for execution
Spot trading is immediate, meaning a trade is completed as soon as the order meets the target buy or sell price. Plus, you can hold the assets for as long as you want. Derivatives trading, on the other hand, is limited to a specific time in the future.
The only fee associated with spot trading is the transaction fee or the exchange fee. The trader can hold the crypto asset for any period without paying any extra fees. This is opposed to derivative traders, who need to pay taker or maker fees. This is alongside holding fees required for traders to keep their positions open.
How to Spot Trade Crypto Securely?
You might think the simplest way to buy and sell crypto assets from the spot market is to use a centralized exchange (CEX). Since these exchanges use the order book model for crypto trading, the experience is very similar to stock trading. However, as mentioned, centralized exchanges are often custodial and don’t allow you true ownership of your assets. Luckily, there is a secure alternative that allows you to spot trade easily and in full control of your assets.
Ledger Live is a single interface that allows you to conduct all crypto transactions securely and seamlessly. This single app makes it easy to buy cryptocurrencies using trusted on-ramp solutions like Moonpay, Ramp Network, and Binance. That means you can buy and sell cryptocurrencies without handing over your private keys to a centralized entity. Ledger Live lets you protect your funds directly with your Ledger device.
Here is a 5-step method to buy crypto using Ledger Live:
Step 1: Open the Ledger Live app and connect it to the Ledger wallet.
Step 2: Pick your preferred crypto on-ramp service.
Step 3: Choose the cryptocurrency and enter the ‘buy’ amount.
Step 4: Select your mode of payment and add the necessary payment details.
Step 5: Pay the amount and you will receive the crypto in your Ledger wallet.
Once you’ve funded your wallet, you can connect it to a range of DEXs or choose a Ledger Live-integrated DEX like Paraswap to start spot trading with your assets.
Spot Trading: Final Thoughts
Spot orders are multi-faceted: Not every crypto user approaches them in the same way. You could decide to HODL your funds using dollar cost averaging, or decide to use them to spot trade and realize your profits in the mid-term. Alternatively, you might have a completely different strategy! That said, like any other crypto trading strategies, there are a few key considerations you should take before hitting confirm with your crypto wallet.
While much simpler than other techniques, spot trading is not completely risk-free. However, researching any cryptocurrency before you buy them is a must. There’s really no alternative to learning and researching cryptocurrencies as extensively as possible. Plus, keeping up with crypto market news and potential future developments may help you identify investment opportunities.
Whichever way you choose to approach crypto trading—from spot trading to its more complex cousins like swing trading or using crypto arbitrage—be sure to do your homework. Only you can decide if a coin is worth your investment.