In recent years, the trend of investing in cryptocurrencies has sparked interest among many traders across the globe. Celebrities like Gwenyth Paltrow and Bill Gates have endorsed the cryptosystem, launching a cascading effect of ambitious traders into the crypto world.
When beginners embark on their crypto journey, they usually leverage spot trading because of its straightforward nature. Wondering what spot trading is? You may be more familiar with it than you think, as one of the most common spot trading markets is the New York Stock Exchange, ever heard of it?
So, since we’ll focus on spot trading in the world of crypto for this article, we need to cover what crypto trading is first.
What’s crypto trading?
Cryptocurrency, or “crypto” for short, trading is the process of buying and selling cryptocurrencies to gain a profit. Cryptocurrencies are the first pure digital assets that are designed to work as a method of exchange through a computer network. This type of digital currency isn’t reliant on a central authority, like a bank or government, to uphold it.
At the beginning of crypto, every exchange was done by spot trading. In the 2020s, most of the trading in the crypto scene takes place on derivative trading markets. This said, a majority of derivative-based exchanges offer spot trading.
So, let’s uncover the exciting crypto trading approach: Spot trading.
What’s spot trading?
Spot trading is the process of buying and selling crypto at its current market price to produce a trading profit. With spot trades, cryptocurrencies are traded for immediate delivery in the market.
This type of trading has earned a reputation for being the most popular and standard type of crypto investment. Thus, a spot trade will likely be the first interaction a user has as a crypto trader.
How does it work?
Wondering what spot trading in crypto looks like? Here’s the basic premise:
Amanda buys a crypto at its real-time price in the market and holds it in her exchange wallet with the hope that its value will rise or until she chooses to make a subsequent trade.
When Amanda buys the crypto from the seller (who we’ll call “Ryan”), she rightfully takes ownership of the literal cryptocurrency; and as a result, Ryan surrenders ownership of the actual crypto he sells to her.
We’ll dive into a more detailed example of a spot trade in a moment. But first, we need to go over a couple of terms to know when talking about this type of trading.
Spot price
The spot price, also known as the cash price, is the current market price at which an asset can be bought or sold immediately. Spot prices are created by buyers and sellers when they post their buy and sell orders. Thus, this is how spot prices are updated in real-time and fluctuate as orders match.
Spot market
We can’t understand what spot trading is without understanding the spot market. A spot market for crypto trading is a platform where traders can buy and sell crypto assets in real time and with immediate settlement. This type of market is also sometimes referred to as a cash market since traders make their payments in advance.
What’s a spot trading example?
Okay, now that you know what the spot price and spot market are, let’s go back to our friends Amanda and Ryan. We’ll use Bitcoin (BTC) in this example, as it’s the most popular cryptocurrency in the market today and holds the largest market capitalization.
So, say that the spot price of Bitcoin (BTC) is $35,000, and Ryan buys one BTC in the spot market at $35,000. Then, after several weeks, the spot price of BTC rises to $50,000. So, Ryan decides to sell the BTC in the spot market to Amanda. Amanda buys the BTC for its spot price, which is now $50,000, and Ryan profits from the difference, which is $15,000.
Now, let’s say in an alternate scenario Ryan chooses not to sell the BTC when its price rises to $50,000 in the hope that its price will continue to rise. But, a month later, Elon Musk sends out another Tweet that hurts Bitcoin’s reputation, so the BTC price falls to $30,000. If Ryan sells the BTC to Amanda now, at its new spot price, she’ll buy it for $30,000, and Ryan will lose the $5,000.
As you can see, placing spot trades is pretty simple. Thus, it makes sense that it’s a popular method for most traders when they make their debut in the crypto scene.
Advantages of trading in the spot market
The three main advantages of trading crypto in the spot market are the immediate delivery, the lucrative aspect, and the transparent nature.
It’s immediate
Everyone loves Amazon’s same-day delivery. And why wouldn’t we? No one wants to play the waiting game. Well, the same goes for trading. Spot trading is where a buyer and seller can experience on-the-spot dealings. This is all thanks to technological advances in the spot market, which have made rapid transactions possible.
It’s lucrative
Trading in the spot market is a lucrative endeavor. This is because spot trading facilitates buying assets at low prices to sell them when the price spikes. In turn, this promises a balanced profit-making business.
It’s transparent
Spot trading is transparent and regulated. Transactions between the buyer and seller happen in a transparent fashion that’s based on supply and demand. As a result, this alleviates traders’ fears of illegal transactions and gives them a heightened sense of security.
As we’ve covered, spot trading crypto involves buying assets at real-time market prices. These prices support the spot market’s transparency reputation because they’re public information that all parties are made aware of.
Are there any risks?
Although this type of trading presents great benefits, it also comes with certain risks. The main drawback of trading in the spot market centers around volatile assets. Because of the volatility of particular instruments and commodities, traders are able to purchase on-the-spot. However, this means that traders could fall victim to buying an asset at its inflated price before it finds its “true price.”
How do you make money from spot trading in crypto?
So, you know what spot trading is now, but let’s get to the question you’ve really been waiting for: How does spot trading make me money?
Spot traders make profits by purchasing cryptocurrencies at a specific time and then selling them on the spot market once their price rises. To increase chances of gaining profit, traders will use lower time frames for buying and selling a wide range of crypto. This is how they’ll make consistent, short-term gains which will earn them a lucrative profit in the long run.
While this type of trading is a great way to kick off your crypto journey, there are a couple of alternatives to spot trading you may want to take a whack at as well.
What’s futures trading?
The main alternative to spot trading is futures trading. This type of trading occurs when you trade contracts in the futures market, but you don’t acquire ownership of the crypto asset. Investors will bet on the price of a particular asset, like Bitcoin, to either spike or fall. Then, they’ll either experience a profit or a loss based on how accurate their prediction was.
What’s spot grid trading?
A spot grid trading strategy is when traders place orders above and below a set price. This constructs a “trading grid” of orders at incrementally increasing and decreasing prices. With this type of strategy, a trading bot automates the buying and selling. The bot is designed to place buy and sell orders in the spot market at preset intervals within a predefined price range.
Final thoughts
Now that you understand the basics of what spot trading is, you might feel ready to dive in head first to the thrilling world of crypto.
But before you pull the trigger, you should consider pairing your knowledge of spot trading with technical analysis to ensure you’re prepared for the crypto scene. With Chart Prime, our technical analysis tools can be used on all devices and across all markets to set you up for successful trades.