What is spot trading?
Spot trading is basically an open financial market where assets — shares, commodities, bonds, forex, or digital assets — can be traded immediately, and the transfer of the same is almost done on the spot. This trade can be done through either fiat currencies or cryptos. Since the payments are made upfront, spot markets are also alternatively known as cash markets. The most popular and widely-used spot markets are NYSE and NASDAQ.
Spot trading in cryptos
Spot trading is the usual direct buy/sell of cryptos for immediate delivery. As the name suggests, the cryptos are exchanged on the spot in real-time between the buyer and the seller across the globe at any time of the day at the current price. The trade happens almost as soon as a bid and asks for matches. One needs to have the required amount of digital assets readily available to make this trade, as the exchanged/bought cryptos are delivered instantly in the e-wallet. Spot trading gives instant and direct ownership and staking rights on significant forks. Since spot trading can only be done with the asset that you already own, there is no option for margin or leverage.
While making a spot trade, one must keep in mind that spot price and futures price are not the same, and the latter is often higher than the former. While spot price is the current cost for immediate exchange, the futures price is an agreed-upon price for cryptos to be delivered in the future, most likely within a few months.
These transactions can be done over-the-counter, which happens directly between individuals or through exchanges acting as intermediaries. In such transactions, one can buy/sell assets in exchange for cryptos, stablecoins, or fiat currencies. In case exchanges act as intermediaries, they also take care of security, ensure regulatory compliance, etc. Both centralized and decentralized exchanges offer this facility and make the process easier by managing regulatory compliance, security, custody, and other factors. Most exchanges charge a trading fee between 0.1% and 2%, depending on your investment amount and whether you’re a maker (one who provides liquidity by creating buying or selling orders) or a taker (one who fills the maker’s orders by buying or selling instantly). Some of the exchanges where one can do spot trading are Binance, Coinbase, Kraken, etc. The profits made through spot trading are taxable in most parts of the world.
One can buy cryptos at the current price and hold those till the value of the cryptos increase. It is simple and entails less risk, and hence is advisable for new entrants in the market. Since in this kind of trading, you can only trade the number of cryptos/digital assets you own in your account, you will never lose more than that amount and thus escape over-leveraging. But this also means that your trading options are limited by the capital you own. This might lead you to miss out on trading opportunities. Also, since the spot prices of cryptos keep fluctuating, one needs to be able to understand and gauge market sentiments in order to make the most of spot trading.
