Résumé
Spot trading involves directly buying or selling financial instruments and assets such as cryptocurrencies, currencies, stocks or bonds. Delivery of the asset is often immediate. Spot trading takes place on spot markets, which are either stock markets or over-the-counter markets (directly between traders). When trading on spot markets, you can only use assets that you own. There is no leverage or margin.
Centralized exchanges for spot trading manage regulatory compliance, security, custody, and other factors to facilitate trading. In return, they charge transaction fees. Decentralized exchanges provide a similar service, but through blockchain smart contracts.
Introduction
Spot trading offers a simple way to invest and trade. When you start investing in cryptocurrencies, you typically start by making a spot transaction, such as purchasing BNB at market price and HODLing them.
Spot markets exist in different asset classes, including cryptocurrencies, stocks, commodities, Forex, and bonds. You're probably more familiar with the markets and spot trading than you think. Some of the most popular markets, like the NASDAQ or the NYSE (New York Stock Exchange), are spot markets.
What is a spot market?
A spot market is a financial market open to the public where assets are traded immediately. A buyer purchases an asset from a seller using fiat funds or another medium of exchange. Delivery of the asset is often immediate, but it depends on what is being traded.
Spot markets are also known as cash markets because traders make immediate payments. Spot markets come in many different forms, and third parties, known as exchanges, typically facilitate trading. You can also trade directly with others in over-the-counter (OTC) transactions. We will come back to this later.
What is spot trading?
Spot traders try to make gains in the market by purchasing assets and hoping that their value will grow. They can sell their assets later in the market to realize a profit when the price rises. Spot traders can also sell short. This process involves selling financial assets and buying back more when the price falls.
The current market price of an asset is known as the spot price. By using a Market order on an exchange, you can buy or sell your holdings immediately at the best available spot price. However, there is no guarantee that the market price will not change during the execution of your order. There may also not be enough volume to fill your order at the price you wanted. For example, if your order is for 10 ETH at the spot price, but only 3 are offered, you will need to fill the rest of your order with ETH at a different price.
Spot prices are updated in real time and change based on order matching. Over-the-counter trading works differently. You can get a fixed amount and price directly from another party without an order book.
Depending on the asset, delivery is immediate or generally within T+2 days. T+2 is the transaction date plus two business days. Traditionally, shares required the transfer of physical certificates. The Forex market has also already transferred currencies through physical transfer, wire transfer or deposit. Now, with digitalized systems, delivery takes place almost immediately. However, cryptocurrency markets operate 24/7, which generally allows for instant trades. Over-the-counter or OTC trading, however, may take longer for delivery.
Comparison of exchanges and over-the-counter transactions
Spot trading is not limited to one location. While most individuals engage in spot trading on stock markets, you can also trade directly with other people without going through a third party. As we mentioned, these sales and purchases are known as over-the-counter (or OTC) transactions. Each cash market has its own differences.
Centralized exchanges
Exchanges exist in two forms: centralized and decentralized. A centralized exchange manages the trading of assets such as cryptocurrencies, Forex and commodities. The exchange acts as an intermediary between market participants and as a custodian of traded assets. To use a centralized exchange, you must load your account with the fiat or cryptocurrency you wish to trade.
A serious centralized exchange must ensure that transactions run smoothly. Other responsibilities include regulatory compliance, KYC (Know Your Customer), fair pricing, security and customer protection. In return, the exchange charges fees on transactions, registrations and other trading activities. For this reason, exchanges can profit from both bull and bear markets, as long as they have enough users and trading volume.
Decentralized exchanges
A decentralized exchange (DEX) is another type of exchange most often encountered with cryptocurrencies. A DEX offers many of the same basic services as a centralized exchange. However, DEXs match buy and sell orders through the use of blockchain technology. In most cases, DEX users do not need to create an account and can trade directly with each other, without having to transfer assets to the DEX.
Trading is done directly from traders' wallets, through smart contracts. These are self-executing pieces of code on a blockchain. Many users prefer the experience of a DEX because it offers more privacy and freedom than a standard exchange. However, there is a downside to this. For example, lack of KYC and customer support can be a problem if you run into issues...
Some DEXs use an order book model, such as the Binance DEX. A more recent development is the automated market maker (AMM) model like Pancake Swap and Uniswap. AMMs also use smart contracts, but implement a different model to determine prices. Buyers use funds in a liquidity pool to trade their tokens. The liquidity providers who supply the pool's funds charge transaction fees to anyone who uses the pool.
Little by little
On the other side, we have over-the-counter transactions, sometimes known as off-exchange transactions. Financial assets and securities are exchanged directly between brokers or traders. Over-the-counter spot trading uses multiple communication methods to arrange trades, including telephone or instant messaging.
Over-the-counter trades have some advantages in not needing to use an order book. If you are trading an asset with low liquidity, such as small cap currencies, a large order can cause slippage. The exchange often cannot fully fill your order at the desired price, so you must accept higher prices to fill your order. For this reason, large volume OTC trades often fetch better prices.
Note that even liquid assets like BTC can experience slippage when orders are too large. Therefore, large BTC orders can also benefit from OTC trades.
What is the difference between spot markets and futures markets?
We have already mentioned that spot markets make instant trades with near-immediate delivery. On the other hand, the futures market offers contracts that settle at a future date. A buyer and seller agree to exchange a certain quantity of goods for a specific price in the future. When the contract matures on the settlement date, the buyer and seller usually agree to settle in cash rather than deliver the asset.
To learn more about futures and options contracts, see the article What are forward contracts and futures contracts?.
What are the differences between spot and margin trading?
Margin trading is available in some spot markets, but it differs from spot trading. As we discussed earlier, spot trading requires you to immediately and fully purchase the asset and take delivery. In contrast, margin trading allows you to borrow funds with interest from a third party, allowing you to take larger positions. As such, borrowing gives the margin trader the opportunity to make larger gains. However, this also magnifies potential losses, so you should be careful not to lose your entire initial investment.
How to spot trade on Binance
Spot trading on Binance is a simple process once you open a Binance account. Let's take a look at the Binance exchange page and explore how to do a spot trade. You can find the trading platform by hovering over [Trader] and clicking [Spot] on the Binance homepage.
You now see the classic trading view, which contains different interesting sections.
1. At the top, you can see the cryptocurrency trading pair and other market information, such as daily price change and volume.
2. The order book lists all open buy and sell orders of an asset organized by price. Green orders are buy orders, and red orders are sell orders. When you place a market order to buy an asset, you take advantage of the lowest price available. If your order still needs additional volume to fill, it will move to the next lowest ask price.
3. Here you will see the customizable chart view with historical price data. TradingView is integrated into the interface and offers you a wide range of technical analysis tools.
4. In the upper right corner you can search for different trading pairs. Here you can choose the cryptocurrency pair you want to trade on the spot market and also bookmark your favorite pairs by clicking on the little stars. Note that you don't necessarily need to buy cryptocurrencies with fiat. If you have other cryptocurrencies, you can also trade them against other currencies and tokens on the spot market.
5. It is in this section that you will create your buy or sell orders. You can see that we are currently in the [Spot] section. Below you can choose between [Limit], [Market] and [Stop-limit] orders.
Let's take a look at the simplest trade you can make: a Market order. In our example, you want to buy $1,000 (BUSD) worth of Bitcoin (BTC). To do this, simply enter 1,000 in the [Total] field and click [Buy BTC]. The exchange will immediately deliver the BUSD to the seller, and you will receive $1,000 (BUSD) worth of BTC.
Advantages and Disadvantages of Spot Markets
Each type of trading and strategy you will encounter has its advantages and disadvantages. Understanding these things will help you reduce risk and trade with confidence. Spot trading is one of the simplest, but it still has advantages and disadvantages.
Advantages of Spot Markets
1. Prices are transparent and depend solely on supply and demand in the market. This aspect contrasts with the futures market which often contains several reference prices. For example, the benchmark price on the Binance futures market is derived from other information, including the funding rate, price index, and moving average (MA) basis. In some traditional markets, the benchmark price may also be affected by interest rates.
2. Spot trading is easy to learn because of its simple rules, rewards and risks. When you invest $500 in the BNB spot market, you can easily calculate your risk based on your entry and the current price.
3. You can “trade and forget”. Unlike derivatives and margin trading, with spot trading you don't have to worry about being liquidated or having a margin call. You can enter or exit a trade whenever you want. You also don't need to continue to monitor your investment unless you want to make short-term trades.
Disadvantages of spot markets
1. Depending on what you trade, spot markets can leave you with assets that are impractical to hold. Commodities are perhaps the best example. If you are purchasing crude oil, you will need to take care of the physical delivery of the asset. With cryptocurrencies, holding tokens and currencies requires you to secure them. By trading futures derivatives, you can still gain exposure to these assets, but settle in cash.
2. For some assets, individuals and businesses, stability is valuable. For example, a company that wants to operate abroad must have access to foreign currencies in the Forex market. If it uses the spot market, the planning of expenses and income would be very unstable.
3. The potential gains in spot trading are much less than in futures or margin trading. You can apply leverage to the same amount of capital to trade larger positions.
To conclude
Spot trading is one of the most common ways to trade, especially beginners. Although it is simple, it is always good to have additional knowledge of its advantages, disadvantages and potential strategies. Besides the basics, you should consider combining your knowledge with strong technical, fundamental, and market sentiment analysis.
