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Introduction to Spot Trading

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2022-10-17
Introduction to Spot Trading

Many crypto traders' first interaction with cryptocurrency will be a spot transaction, where they will make a spot transaction in the spot market, for example purchasing Bitcoin at the market price, and HODLing the coin until it rises in value.

By the end of this article, you will know how spot trading works in the crypto market.

What is spot trading in crypto?

Spot trading in crypto is the process of buying and selling cryptocurrencies at real-time prices with the aim of generating a trading profit.

While investing is popular in crypto, which typically involves holding (or “HODLing”) a crypto asset for the medium or long-term. Spot traders typically buy and sell a range of cryptocurrencies in an attempt to generate regular short-term profits.

When engaging in spot trading, you take ownership of the actual cryptocurrencies you buy and give up ownership of the cryptocurrencies you sell. This differs from trading derivatives, for example, where you trade a financial product that tracks the price of a cryptocurrency as opposed to the actual cryptocurrency itself.

Examples of spot trading

The core idea of spot trading is to buy low and sell high as often as possible to maximize trading revenues. Let's look at the following example using Bitcoin (BTC) and the popular dollar-backed stablecoin Tether (USDT).

Andrew places a buy order to get an equivalent BTC amount of 1,000 USDT at $20,000/BTC. Daisy is matched with Andrew who offers to sell her BTC for USDT at the aforementioned price.

Immediately when Andrew and Daisy reach an agreement, the order will be filled and executed. Andrew will receive 0.05 BTC, while Daisy will receive 1000 USDT.

Case 1

If after a day, the price of BTC increased to $20,600/BTC and Andrew decides to sell his coins, they would be worth approximately 1,030 USDT, meaning he made a profit of 30 USDT.

Case 2

If after a day, the price of BTC decreased to $19400 /BTC and Andrew decided to sell his coins, they would be worth approximately 970 USDT. Andrew made a loss of 30 USDT.

*Note: This example does not take into account fees. Depending on the order type of your choice, actual results may vary slightly.

Where can you trade the crypto spot market?

Over the Counter (OTC)

OTC spot trading takes place between two parties outside of crypto exchanges. Dealers/brokers act as the market makers by quoting different prices at which they will buy/sell a cryptocurrency. OTC trading often comes cheaper than exchange trading and the price of trading is not necessarily disclosed to third parties.

OTC spot markets are usually private and less regulated than the exchange landscape. Moreover, they allow traders to buy and sell larger amounts of crypto without moving the market price too much

Peer-to-peer (P2P)

Peer-to-peer trading allows traders to trade cryptocurrencies among themselves. Similar to OTC, peer-to-peer trading can be carried out without the involvement of third parties or intermediaries.

P2P trading gives you more control over your trading activities like choosing sellers, buyers, settlement time, pricing, and payment methods. Most P2P platforms require buyers and sellers to create bids and offer using these preferences to enable trades to occur more smoothly.

While P2P comes with good benefits, the trading environment can be risky without third parties facilitating trades via escrow services between traders. P2P trading can also suffer from low liquidity and slow settlement time.

Centralized exchanges (Bitget)

Similar to traditional stock exchanges and online brokerages, centralized exchanges like Bitget conduct large-scale cryptocurrency transactions using the order book model to match buyers and sellers.

An exchange like Bitget also provides custody services by allowing you to deposit and store your crypto assets on their platform. Through centralized exchanges, you can enjoy higher liquidity on your preferred asset, fast trading times, security, and customer protection. For providing these services, Centralized Exchanges charge users transaction fees on every trade they make. Currently, Centralized exchanges are the most utilized form of accessing the crypto spot market.

In order to celebrate the crypto space, Bitget is now offering a 0-fee policy, meaning that any transactions on our spot markets are completely free of charge. Give it a try, and if you sign up through the link below, you can receive up to $4000 starting bonuses! Website: https://partner.bitget.com/bg/ZZJ4YJ



Disclaimer:

The information provided above is not financial advice but for educational and entertainment purposes. Please do your own due diligence or consult a financial advisor before investing in any digital assets.

All opinions expressed on Bitget’s Soapbox (also known as the ‘Soapbox’) are opinions of individual traders using the Bitget platform, and do not reflect the opinions of Bitget or its affiliate companies and partners. The Soapbox author’s opinions are based upon information they confirm to be reliable, but neither Bitget nor its affiliates warrant its complete accuracy, and it should not be relied upon as such.

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