Summary
Spot trading involves buying or selling financial instruments and assets directly, such as cryptocurrencies, Forex, stocks or bonds. These assets are often delivered immediately. Spot trading takes place in spot trading markets, which are either platform-based or off-platform (directly between traders). When trading on the spot markets, you can only use assets you already own – there is no leverage or leverage trading.
Centralized spot trading platforms manage regulatory compliance, safety, asset management and other factors to facilitate trading. In return, these platforms charge transaction fees. Decentralized communication platforms provide a similar service, but via smart contracts on the blockchain.
the introduction
Spot trading provides a simple way to invest and trade. Your first experience investing in cryptocurrencies will most likely be in the form of a spot transaction on the spot market, such as buying and holding BNB at market price.
Spot trading markets exist across different asset classes, including cryptocurrencies, stocks, commodities, forex and bonds. You are probably more familiar with the spot trading markets and spot trading operations than you think. Some of the most popular markets such as NASDAQ or NYSE (New York Stock Exchange) are spot trading markets.
What is the spot trading market?
The spot trading market is a financial market open to the public in which assets are traded instantly. The buyer purchases the asset from the seller in approved local currencies or another trading medium. The asset is often delivered immediately, but this depends on what is being traded.
Spot markets are also known as cash markets, because traders make advance payments. Spot markets come in different forms, and third parties, known as trading platforms, usually facilitate the trades. You can also trade directly with others in over-the-counter (OTC) trading. We will talk about it in detail later.
What is spot trading?
Spot market traders seek to make profits in the market by purchasing assets with the expectation that their value will rise. They will be able to sell the assets later in the spot trading market in exchange for a profit when their price increases. Spot traders are also able to sell short in the market. This process involves selling financial assets and buying back more when their price falls.
The current market price of an asset is known as the spot price. By using market orders on a trading platform, you can buy or sell assets instantly at the best available spot price. But it cannot be guaranteed that the market price will not change during order execution. There may not be volume available that allows you to place your order at your desired price. For example, if you order 10 ETH units at the spot price, but only 3 are offered, you will have to fulfill the rest of the order in ETH coins at a different price.
Spot trading prices are updated in real time and change as orders are matched. As for immediate trading outside the platforms, it works differently, as it provides you with a fixed quantity and price directly from another party without the need for an order list.
Depending on the asset being traded, delivery is immediate or usually within T+2. T+2 means trading date plus two business days. In the past, purchasing shares and shares required the transfer of physical certificates. The foreign exchange market used to transfer currencies via physical money, wire transfers, or bank deposits. Now that digital systems have been developed, assets are delivered almost instantly. But digital currency markets operate 24 hours a day, seven days a week, allowing for instant trades. But peer-to-peer or off-platform trading requires a long delivery time.
The difference between trading platforms and off-platform trading
Spot trading is not limited to just one place. While most individuals practice spot trading on platforms, you can also trade directly with others without the need for an external party. As mentioned, these buying and selling operations are known as off-platform trades. Each type of spot trading market is different from the other.
Central trading platforms
Trading platforms are available in two forms: centralized and decentralized platforms. Centralized platforms manage trading of assets such as cryptocurrencies, forex and commodities. The platform acts as an intermediary between market participants and a custodian of traded assets. In order to use the Central Trading Platform, you must place the approved digital or local currencies you wish to trade in your account.
Serious centralized trading platforms ensure that transactions are executed smoothly. Its other responsibilities include regulatory compliance, identity authentication, fair pricing, security, and customer protection. In return, the platform charges fees for transactions, listings and other trading activities. Thanks to this, these platforms make profits in both bull and bear markets, as long as they have the right number of users and trading volume.
Decentralized trading platforms
A decentralized trading platform is another type of platform that is commonly used in the cryptocurrency space in particular. The decentralized trading platform offers many of the basic services provided by the centralized trading platform. But decentralized trading platforms match buy and sell orders using blockchain technology. Most often, users of decentralized trading platforms do not need to create an account and can trade directly with each other, without needing to transfer assets to the decentralized trading platform.
Trading takes place directly from the trader's wallet via smart contracts. They are self-executing codes on the blockchain. Many users prefer to try a decentralized trading platform because it provides them with more freedom and privacy compared to traditional trading platforms. But this freedom has consequences. For example, the lack of authentication and customer support is a drawback if you encounter problems.
Some decentralized trading platforms use an order list model, such as the Binance decentralized trading platform. A recent development in decentralized platforms is the Automated Market Maker (AMM) model, which platforms such as PancakeSwap and Uniswap are adopting. The automated market maker model also uses smart contracts, but applies a different pricing model. Buyers use the funds in the liquidity pool to swap tokens. The liquidity providers that supply the pool with funds charge transaction fees, which are paid by anyone using the pool.
Trading outside platforms
On the other hand, there is off-platform trading, in which assets and securities are traded directly between brokers, traders and dealers. Spot trading in the OTC market uses multiple means of communication to organize trading operations, including phones and instant messaging.
Off-platform trading has some advantages because it does not require the use of an order list. If you are trading an asset with low liquidity, such as low market cap currencies, a large order may cause slippage. Often the trading platform is unable to fully execute your order at the requested price, so you are forced to accept higher prices to complete the order. For this reason, off-platform trades often have better prices.
Note that even liquid assets like BTC can experience slippage when order volume exceeds a certain threshold. So huge BTC orders can also benefit from off-exchange trades.
What is the difference between spot markets and futures markets?
We mentioned previously that spot trading markets involve instantaneous trading and delivery is almost instantaneous. As for the futures market, the contract value is paid at a later date. The buyer and seller agree to trade a certain amount of a commodity at a specific price in the future. When the contract matures on the settlement date, the buyer and seller usually reach a cash settlement in lieu of delivering the asset.
To learn more about futures contracts, please see the article What are Futures and Futures?
What are the differences between spot trading and futures trading?
Carrying trading is available in some spot trading markets, but it and spot trading are not the same thing. As mentioned previously, spot trading requires that the entire asset be purchased immediately and received. In contrast, leverage trading allows you to borrow money at interest from an outside party, allowing you to enter into larger trades. Hence, borrowing provides the borrowing trader with the possibility of making greater profits. But borrowing also magnifies potential losses, so you should be careful not to lose your entire initial investment.
How to trade instantly on the Binance platform
Binance provides a simple way to instant trading that starts with creating a Binance account. Let's take a look at the Binance interface and learn how to make an instant trade. You will access the trading platform by hovering over [Trade] and clicking [Instant] on the Binance homepage.
Now you will be presented with the trading interface, which includes a number of various sections.
1. At the top, the cryptocurrency trading pair and other market information, such as price changes and trading volume on a daily basis, are shown.
2. The order list lists all open buy and sell orders for an asset, sorted by price. Green orders represent buy orders, and red orders represent sell orders. When you place a market order to buy an asset, you get the lowest price offered. If your order still requires increased trading volume to be executed, it will move to the next order with a lower price offered.
3. Here you will see the chart interface containing customizable historical price data. The window also contains the TradingView interface, which provides the user with a variety of technical analysis tools.
4. In the upper right corner, you can search for different trading pairs. Here, the user has the opportunity to select the digital currency trading pair that he wishes to trade on the spot trading market, and he is also able to create a favorite list of trading pairs by clicking on the small stars. Knowing that you do not have to buy digital currencies with the approved local currency. If you have other cryptocurrencies, you can also trade them for other currencies and tokens on the spot market.
5. In this section you can create buy or sell orders. As you can see, it is set in the figure below to the [Immediate] section. Below, you can choose between [Limit], [Market] and [Stop Limit] orders.
Let's take a look at the simplest spot trade you can make: a market order. In this example, we want to buy $1,000 worth of Bitcoin (BTC) (BUSD). To do this, all we have to do is type 1000 in the [Total] box, then click [Buy BTC]. The exchange will immediately deliver BUSD to the seller, and you will receive $1,000 worth of BTC (BUSD).
Advantages and disadvantages of spot trading markets
Each type of trading and strategy has its advantages and disadvantages, and understanding them will help you reduce risk and trade with more confidence. Spot trading is a simple type of trading, but it has strengths and weaknesses nonetheless.
Advantages of spot trading markets
1. Transparency is taken into account in displaying prices and depends on supply and demand in the market. This aspect differs from the futures market, which includes several reference prices. For example, the fair price on the Binance futures market is derived from other information, including the funding rate, price index, and moving average. In some traditional markets, the fair price may be affected by interest rates as well.
2. Spot trading is easy to participate in thanks to its simple rules, rewards and risks. When you invest $500 in BNB coins in the spot market, you can easily calculate the risk based on the entry price and the current price.
3. You can “set and forget orders”. Unlike financial derivatives and carry trading, spot trading has the advantage of avoiding liquidation or receiving a call for a carry trade. You can also enter and exit trades whenever you want. You do not have to constantly monitor your investments, unless you want to make short-term trades.
Disadvantages of spot trading markets
1. Depending on the assets you trade, you could exit the spot markets with assets that are not easy to own. Commodities are the best example of this. If you make a spot purchase of crude oil, you will have to take delivery of the physical assets. For cryptocurrencies, holding tokens and currencies puts it on you to secure and protect them. By trading futures derivatives, you can still have exposure to these assets while settling in cash.
2. For certain assets, individuals and companies, stability is important. For example, a company that wants to operate outside the country needs hard currency in the foreign exchange market. If this company relies on the spot trading market, planning expenses and income will be subject to instability.
3. The potential gains from spot trading are much lower than futures or carry trading. You can use leverage on the same amount of capital in order to trade larger positions.
Concluding thoughts
Spot trading in the spot markets is one of the most popular ways to trade, especially for beginners. Despite its simplicity, it is always a good idea to gain additional knowledge of its advantages, disadvantages, and available strategies. Other than basic information, it should combine knowledge, technical analysis, fundamental analysis and market trend analysis.
