Understanding the Crypto Spot Market (Part 1)
In this article, we will walk you through the basics of the crypto spot market as well as some tips to get started with spot trading.
Understanding a Spot Trade
The act of buying or selling a currency, or a financial instrument for prompt delivery on a specific date is referred to as a spot trade. The majority of spot contracts require the actual delivery of the money, good, or instrument; the price difference between a future or forward contract and a spot contract accounts for the time value of the payment, which is determined by interest rates and the length of time until maturity. The exchange rate upon which a foreign exchange spot trade is based is known as the spot exchange rate.
To facilitate spot trading, centralized exchanges for spot trading manage regulatory compliance, security, custody, and other elements. Exchanges receive transaction fees in exchange. Similar services are offered by decentralized exchanges, except they use blockchain smart contracts.
By expecting an increase in their value, spot traders buy assets in an effort to profit from the market. When the price rises, they can profitably sell their assets on the open market.
The market value of an asset is referred to as its spot price. Use a market order on an exchange to quickly buy or sell your assets at the best current price. While your order is being executed, there is no assurance that the market price won't change. Furthermore, there might not be enough products available to fulfill your order at the required price. If, for example, your order is for 10 ETH at the spot price but only 3 are available, you will need to fill the rest of your order with ETH at a different price. As orders are matched, spot prices are updated in real-time. Spot trading over-the-counter operates differently.
Examples of spot trading in the cryptocurrencies market
To maximize trading profits, the fundamental principle of spot trading is to buy low and sell high as frequently as feasible. Consider the following scenarios using Bitcoin (BTC) and the well-known Tether stablecoin (USDT) to better demonstrate how this works.
Bob places a buy order to purchase 1,000 USDT worth of BTC at $50,000 per BTC. Bob is paired with Alice, who offers to exchange USDT for BTC at the stated price. Alice will receive 1000 USDT, while Bob will receive 0.02 BTC.
Case 1: If the market price of bitcoin rose to $55,000 after a day and Bob decides to sell his coins for profit, they would be valued at about 1,100 USDT, meaning he would have made a profit of 100 USDT.
Case 2: If the market price of bitcoin fell to $45,000 per bitcoin after a day and Bob opted to sell his coins, they would be valued at about 900 USDT. Bob suffered a 100 USDT loss.
How Do Spot Markets Operate?
Spot markets are open exchanges of cash for assets, commodities, or other financial instruments. The majority of the time on the spot market, the buyer and seller of commodities may not transfer money at the same moment the trade happens, but they nevertheless agree to a right-now trade. There are few exceptions even though futures contracts are not considered spot deals because the underlying assets are delivered at a predetermined future date. Given that the buyer and seller exchange cash for an item at that same location, a futures contract that is approaching its expiration may be referred to as a spot trade.
Spot markets vs. Futures markets
Spot markets provide instant trades with nearly immediate delivery, as was already indicated. Contrarily, contracts in the futures market are paid for at a later time. In the future, a buyer and seller agree to exchange a specified quantity of items for that price. The buyer and seller often reach a financial settlement rather than hand over the asset after the contract expires on the settlement date.
Spot trading vs. Margin trading
While margin trading is available on some spot markets, it is not the same as spot trading. As we've mentioned, spot trade necessitates immediate full payment and asset delivery. In contrast, margin trading allows you to take on larger bets by letting you borrow money at interest from a third party. Therefore, borrowing enables a margin trader to perhaps achieve greater profits. Because it also amplifies any possible losses, you should exercise caution to avoid losing your entire initial investment.
Where Does the Cryptocurrency Spot Market Trade?
You can trade cryptocurrencies on over-the-counter, peer-to-peer, centralized, and decentralized exchanges. Let's look at each segment of the spot market for cryptocurrencies.
Over-the-counter (OTC) spot trading is when two parties trade cryptocurrency outside of crypto exchanges. Dealers and brokers act as market makers by offering a range of prices at which they will buy or sell a coin. OTC spot markets are often private and less regulated than exchange environments. They also make it possible for dealers to exchange larger amounts of cryptocurrency without materially changing the market price.
Similar to OTC, peer-to-peer trading is available without the use of intermediaries. With peer-to-peer trading, you have more control over your trading activities, including the ability to choose your sellers, buyers, settlement dates, prices, and payment methods. Most P2P systems require that buyers and sellers establish bids and offers using these preferences in order to facilitate exchanges. Even while P2P has numerous benefits, the trading environment might be risky without the help of other parties.
If you prefer this method, join Bitget P2P platform today! Bitget P2P allows you to control who they trade with, the price, the payment method, or the time of settlement, and at the same time helps to limit the risks.
Decentralized Exchanges (DEXs)
Decentralized exchange platforms provide you with direct access to the spot market. Users frequently trade against the liquidity in a type of smart contract known as an automated market maker (AMMs), in contrast to the old P2P approach or CEXs (AMMs). Users can trade cryptocurrencies directly from their wallets without ceding control of their assets. Through decentralized exchanges, you can access the spot market without giving up your privacy or running the risk of doing business with a third party. On DEXs, trading expenses are often lower. However, if their blockchain networks get congested, transaction fees can increase. DEXs can have low liquidity and are generally more challenging to utilize than their centralized counterparts.
Centralized Exchanges (CEXs)
Despite the rapid evolution of Decentralised Finance (DeFi), CEXs remain enormously popular due to the high level of liquidity and security. CEXs use the order book system to match bid and ask price, which means the more orders there are, the more liquid the market is. CEXs also provide fiat-crypto trading pairs and act as the guarantee for the completion of transactions. They are especially beginner-friendly - most individual investors made their first crypto transactions “on-ramp” or, in simpler terms, with their credit cards. Right now, using CEXs is the most common way to access the cryptocurrency spot market.
Bitget is one major crypto spot trading with 2 million users from 50 countries worldwide. We are one of the most secured crypto trading platforms with the A+ ranking for 12 SSL indicators. We have also obtained operational licenses from three different jurisdictions, the U.S., Canada, and Australia. Bitget Team also works closely with local authorities worldwide to ensure a seamless operation on a global scale.
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