In brief
Spot trading involves the direct purchase or sale of financial instruments and assets such as cryptocurrencies, foreign exchange, stocks or bonds. When trading, assets are usually transferred immediately. Spot transactions are carried out through two main methods: through the trading floor or over-the-counter (directly between traders). When trading on the spot market, you can only use assets that you own - that is, no leverage or margin.
Exchanges that offer spot trading services manage regulatory compliance, security, custody, and other factors to make trading easier. In return, these exchanges will collect transaction fees from users. Decentralized exchanges offer a similar service, but through blockchain smart contracts.
Introduce
Spot trading is a simple method of investing and trading. Spot trading is very popular with those new to cryptocurrency investing, for example buying BNB at market price and then HODLing.
The spot market is made up of many different asset types; including cryptocurrencies, stocks, commodities, forex and bonds. Basically, the spot market is not difficult to understand or access, if not very simple. Some popular spot markets you may know are NASDAQ or NYSE (New York Stock Exchange).
What is the spot market?
The spot market is a financial market open to everyone. Here, assets are traded instantly. The trader purchases the asset using fiat currency or another medium of exchange from the seller. Asset delivery is usually immediate, but this depends on what is being transacted.
Sometimes, this market is also called the cash market, because traders will make payments in advance. Spot markets come in many different forms. Third parties, called exchanges, often facilitate trading. You can also trade directly with others in over-the-counter (OTC) transactions. We will consider these later.
What is spot trading?
Spot traders try to make a profit in the market by buying assets and hoping they will increase in value. They can then sell their assets on the spot market to make a profit when prices rise. Spot traders can also short sell the market. This process involves selling financial assets and buying them back in larger quantities when prices fall.
The market price of the asset at the present time is called the spot price. With a market order (market order) on an exchange, you can buy or sell your asset holdings instantly at the best spot price available. However, there is no guarantee that the market price will not change while your order is being executed. There may also not be enough volume to fill your entire order at the price you want. For example: If your order is to buy 10 ETH at the spot price, but only 3 ETH is offered, you will have to buy the remaining ETH from your order at a different price.
Spot prices update in real time and may change upon order matching. Spot trading is another type of spot trading. You can buy or sell cryptocurrency directly at a specified amount and price from another trader without using an order book.
Depending on the asset type, cryptocurrency delivery usually happens instantly or within T+2 days. T+2 means trading day plus two business days. Traditionally, corporate stocks and common shares (equities) often require the transfer of physical certificates. The foreign exchange market previously also traded by cash transfer, wire transfer or deposit. Now with the digital system, deliveries take place almost instantly. However, the cryptocurrency market operates 24/7 allowing for instant transactions. However, peer-to-peer or OTC transactions may take longer to deliver.
Exchange trading and over-the-counter (OTC) trading
Spot trading doesn't just happen in one place. While most individuals will make spot trades on exchanges, you can also trade directly with others without the need for a third party. As mentioned, these sales transactions are called over-the-counter (OTC) transactions. Each spot market has its own differences.
Centralized Exchange (CEX)
Basically, there are two types of exchanges: centralized and decentralized. Centralized exchanges manage the buying and selling of assets such as cryptocurrencies, foreign exchange, and commodities. The exchange acts as an intermediary between market participants, as a custodian of the assets being traded. To use a centralized exchange, you must deposit the fiat currency or cryptocurrency you want to trade into your account.
A seriously operating trading floor needs to ensure transactions go smoothly. This responsibility includes regulatory compliance, KYC (Know Your Customer), fair pricing, security and customer protection. In return, the exchange collects fees from user transactions, listing fees, and other transaction fees. Because they operate like this, exchanges can profit when the market is bullish (going up) or bearish (going down), as long as they have enough users and trading volume.
Decentralized exchange (DEX)
Additionally, there are decentralized exchanges (DEX) which are another type and characteristic of cryptocurrencies. 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 the need to transfer assets to the DEX.
Transactions take place directly from the trader's wallet and through smart contracts. These are self-executing pieces of code on a blockchain. Many users enjoy the experience of a DEX because it offers more privacy and freedom than a standard exchange. However, this also comes with a trade-off. For example, the lack of KYC and customer support can be an issue if you accidentally encounter problems..
Some DEXs use an order book model, such as Binance DEX. A new model that has become more popular recently is the Automated Market Maker (AMM) model, notably Pancake Swap and Uniswap. AMM also uses smart contracts but implements a different model to determine prices. Buyers use funds in a liquidity pool to swap their tokens. The liquidity providers that supply funds to the pool will profit from the transaction fees charged by anyone using the pool.
OTC trading
OTC (Over-the-counter) trading is also known as over-the-counter trading, or sometimes called off-exchange trading. Financial assets and securities are traded directly between brokers, traders and dealers. Spot trading in the OTC market uses a variety of communication methods to organize trades, including telephone and instant messaging.
Because there is no need to use an order book, OTC trading has several advantages. If you are trading an asset with low liquidity, such as small-cap coins, a large order can cause slippage. The exchange is often unable to fully fill the order at the price you desire, so you must set a higher price to complete the order. For this reason, large OTC exchanges often give better prices.
Note, even liquid assets like BTC can experience price slippage when orders are too large. So, using OTC to trade large amounts of BTC can also be beneficial.
What is the difference between the spot market and the futures market?
As mentioned, the spot market executes transactions instantly, deliveries are also instantaneous. In contrast, futures markets trade using contracts with payment terms at a future date. Buyers and sellers 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 often pay in cash rather than deliver the assets.
To know more about futures and options contracts, read the article Forward contracts and futures contracts.
What is the difference between spot trading and futures trading?
Margin trading is available in some spot markets, but it is not the same as spot trading. As we mentioned earlier, spot trading requires you to purchase the asset in full and take delivery immediately. In contrast, margin trading allows you to borrow money at interest from a third party, which allows you to take on larger positions. Therefore, borrowing offers the margin trader the potential for more significant profits. However, it also increases the possibility of losses. Therefore, you should be careful not to lose all your initial investment.
How to trade spot on Binance
Using spot trading on Binance is simple if you have registered a Binance account. Let's take a look at Binance's trading mode and discover how to execute spot trading. You can find the Spot trading platform by hovering over [Trade] and clicking [Spot] on the Binance homepage.
You will now see the transaction view, which has several different sections.
1. At the top, you can see the cryptocurrency trading pair and other market information, such as volume and daily price changes.
3. The order book lists all open buy and sell orders of an asset and they are sorted by price. Green orders are buy orders and red orders are sell orders. When you place a market order to buy an asset, you will receive the lowest price offered. If your order still needs more volume to fill, the order will move up to the next lowest ask price.
3. 2. Here you will see a chart view with customizable historical price data. Built into the window is TradingView, an interface that provides you with many different technical analysis tools to use.
4. In the top right corner, you can search for different trading pairs. Here you can select the cryptocurrency pair you want to trade on the spot market and can also mark your favorite pairs by clicking on the little stars. Note, you do not necessarily have to buy cryptocurrency with fiat currency. If you happen to have other cryptocurrencies, you can also exchange them for other coins and tokens on the spot market.
4. This section is where you will create buy or sell orders. It is located in the [Spot] section. Below you can choose between [Limit], [Market] and [Stop-limit] orders.
Take for example the simplest spot trade you can make: a market order. Let's say you have $1,000 (BUSD) and want to use it to buy some bitcoin (BTC). To do this, all you need to do is enter 1,000 in the [Total] field and click [Buy BTC]. The exchange will instantly deliver the BUSD to the seller and you will receive $1,000 worth of BTC (BUSD).
Advantages and disadvantages of the spot market
Each trading type and strategy has its own advantages and disadvantages. Understanding these things will help you minimize risks and trade more confidently. Spot trading is relatively simple and easy to use, but it still has its strengths and weaknesses.
Advantages of the spot market
1. Prices are transparent and based only on supply and demand in the market. This aspect contrasts with futures markets which often contain multiple reference prices. For example, the reference price in the Binance futures market is derived from other information, including funding rates, price indices, and Moving Average (MA) Basis. In some traditional markets, reference prices may also be affected by interest rates.
2. It is easy to use spot trading, because its rules, advantages and risks are relatively simple. When you invest $500 in BNB on the spot market, you can easily calculate your risk based on the price you bought and the current price.
3. You can "set it and forget it". Unlike derivatives or margin trading, with spot trading you don't need to worry about being liquidated or receiving a margin call. You can enter or exit a trade whenever you want. You also don't need to constantly check your investments, unless you want to make short-term trades.
Disadvantages of the spot market
1. Not all assets or commodities are easy to hold on the spot market. Commodities are perhaps the best example. If you buy crude oil spot, in effect, you will have to actually buy the oil and store it. With cryptocurrency, holding tokens and cryptocurrencies gives you the responsibility to keep them safe and secure. By trading futures derivatives, you can still trade these assets without paying in cash.
2. For some assets, individuals and companies, stability matters a lot. For example, a company that wants to operate abroad needs access to foreign currency in the foreign exchange market. If they rely on the spot market, their spending and income planning will be very unstable.
3. Potential profits in spot trading are much less than futures or margin trading. With the above methods, you can leverage the same amount of capital to trade larger positions.
summary
Spot trading in the spot market is one of the most popular ways for people to start trading. Although spot trading is quite simple, understanding the advantages, disadvantages and potential strategies suitable for this market will help you invest effectively. In addition to the basics, you should learn more about technical analysis, fundamental analysis, and market sentiment analysis to get an edge.
