Spot Trading In Crypto: What Are They, And How Do They Work?

What Is Spot Trading In Crypto?

Crypto exchanges facilitate spot trading, a strategy in which traders buy or sell the underlying crypto asset at a current market price, and the transaction is instantly settled. Generally, spot trading in crypto refers to purchasing the token at a low price and selling it at a high price. However, profit isn’t always guaranteed as the cryptocurrency market is highly volatile, and the ability to turn trades into profits depends upon various factors.

How Does Spot Trading In Crypto Work?

Spot trading in crypto involves two parties agreeing on the price for buying or selling crypto tokens within the exchange, such as Bitcoin or Dogecoin. The current price of the cryptocurrency is called the spot price, which the traders buy and sell instantly.

Buyers place an order to buy crypto tokens with a specific bid or purchase price, while sellers place a particular ask for a specific sell price. Bids and Asks are then logged in Order Books, which are visible on the trading page within the crypto exchange. The transaction takes place once the bid and ask order match.

Here’s what it means:

• Bid is the maximum price of a crypto token a buyer is willing to spend.
  
• Ask is the minimum price of a crypto token a seller is willing to sell.
  
• Order book contains the Ask side for buyers willing to buy and the Bid side for sellers willing to sell. It shows the current buy and sell orders to assist traders in making informed decisions.

For instance, if a trader orders Litecoin at the market value of INR 8,031.27, the trade will automatically take place on the Bid side of the order book on spot trading, which will be fulfilled when a seller sells at the exact price. Similarly, when a trader places an order to sell the crypto token, this transaction will go to the Ask side of the order book.

In spot trading, a trader buys a crypto asset and holds it to sell later at an increased price. However, profit isn’t always guaranteed and is limited to the price difference between buying and selling crypto tokens.

Before investing in spot trading in crypto, obtaining appropriate financial advice is crucial, and investing only in what you can afford to lose.

How To Start Spot Trading In Crypto?

To invest in spot trading in crypto starts with choosing the crypto exchange. Here’s a step-by-step process to begin spot trading in crypto:

Step 1: Open a crypto exchange account and submit relevant KYC documents.

Step 2: Add funds to your crypto wallet.

Step 3:  Place your spot trading order to buy a crypto token.

Step 4: The transaction is complete once the order matches the sell order.

If you’re a beginner, here’s how to buy cryptocurrency.

Spot Trading In Crypto: Pros and Cons

Spot trading in crypto is a low-risk financial instrument compared to crypto derivatives. However, the profit gained often correlates with a lower return.

Alternatives Of Spot Trading In Crypto

Spot Trading in Crypto vs. Crypto Derivatives

Spot trading is a straightforward investment strategy. A trader buys a crypto asset and holds it to sell later at an increased price. However, crypto derivatives are complex financial instruments and come in three variations:

1. Crypto futures contracts involve two parties agreeing on a predetermined price for buying and selling crypto tokens, and they have an expiration date.
   
2. Perpetual contract derivatives exclude the component of “contract expiration,” and traders speculate the market price of the underlying crypto for an indefinite period.
   
3. Crypto options derivatives allow traders to fulfill the contract but don’t bind them to buy or sell the underlying crypto at a predetermined price on or before the expiration date. 

Learn more: What are Crypto Derivatives? Types, Pros & Cons

Spot Trading in Crypto vs. Crypto Arbitrage

Crypto Arbitrage, on the other hand, is a whole different ballgame. Crypto exchanges facilitate crypto arbitrage, a low-risk investment instrument that involves identifying the price difference among exchanges. Traders buy an underlying crypto asset at a lower price from one exchange and sell it at a higher price in another exchange to make profits. 

Learn more: What Is Crypto Arbitrage? How Does It Work?

Bottom Line

Spot trading is a famous strategy traders use when buying and selling the underlying crypto asset wherein the transaction is determined instantly. To gain maximum profits, spot traders purchase any crypto token, such as Bitcoin or Litecoin, at a low price and sell it at a high price. That being said, profit in spot trading isn’t always guaranteed as the cryptocurrency market is highly volatile, and beginners are advised to obtain appropriate financial advice and invest only what they can afford to lose.

Frequently Asked Questions (FAQs)