Cryptocurrency trading is a popular way for many people to make (or lose) money online. Traders typically buy and sell coins within a few hours or days. This differs from crypto investing, which is the process of buying and holding assets for a few months or years. In this article, we will explain what spot trading in crypto is and how it works.
What is crypto spot trading?
Spot trading refers to the process of buying an asset for immediate delivery. Most crypto investors start their journey in the spot market. For example, if Bitcoin is trading at $15,000 and you buy it, you have just made a spot purchase.
Crypto spot trading is a process where you buy a digital coin or token at its exact price. In most cases, the exchange will execute the order at the current price. In other cases, especially when there is significant volatility, slippage will see the order executed slightly below or above the set price.
When spot trading in crypto, it is possible to make money whether the coin is rising or falling. When you expect the coin to rise, you execute a buy trade. On the other hand, when you expect it to fall, some brokers make it possible for you to short the asset.
Spot trading in crypto can involve fiat-to-crypto or crypto-to-crypto transactions. A fiat-to-crypto is where a person exchanges a fiat currency like the US dollar to a crypto like bitcoin.
How spot trading works in crypto
The spot market has three important parts. First, there are buyers, who make the bid for a coin. Second, there are sellers who place an order with a specific “ask” price. The difference between the bid and ask prices is known as the “spread.” A bid is the maximum price that a buyer is willing to pay, while an ask is the minimum price that a seller is willing to receive.
Third, there is the order book, which lists the bid and ask prices. As such, if you place a trade to buy bitcoin, the transaction will go to the bid side of the order book. On the other hand, if you place a short trade, it will go to the ask side of the order book.
So, it’s important for traders to use exchanges that have enough liquidity to buy and sell cryptocurrencies.
For example, if a cryptocurrency is trading at $10, you can place a buy order if you expect it to rise. If it rises to $12, your profit will be $2 per coin. On the other hand, you can place a short trade and profit as the price drops.
Trading involves risk, and most people actually lose money in the process. First, there is a risk that prices will not go as you expected. Second, as we saw with FTX, there is a risk that the exchange will go out of business. Further, there is a slippage risk where your order is filled at a different price than what you selected.
Summary
Spot trading is a popular trading approach in the crypto industry. It differs from other forms of trading, such as futures and options. Crypto futures involve an agreement between a buyer and a seller on the future of a cryptocurrency.
A buyer can agree to buy a crypto at a certain price on a specific date, which is known as its expiry. In most cases, futures in cryptocurrencies are perpetual, meaning that they don’t have an expiration date. In this article, we have explained how spot trading works and the risks involved.
