Spot trading in crypto is best described as an immediate method of trading. It takes current market factors into account rather than futures or forward trading, which considers contracts dated for a later time.
Spot trading may include smaller trades on a shorter time frame, or immediate investments for the long term. For example, a crypto trader may buy parts of a Bitcoin at the current rate to trade it for fiat currency at a greater rate in the short term(that day) or long term (within a few months).
“Spot” is a method of valuation used by many exchanges and individuals. In order to convey spot trading in depth, it helps to understand the components of a functioning spot market.
Elements of an Order Book on a Spot Market
The spot market is the part of an exchange that trades immediately for commodities they provide with multiple traders. In the case of cryptocurrencies, exchanges provide multiple fiat to crypto and/or crypto to crypto pairings, all of which trade on the immediate price.
Many cryptocurrency spot markets allow liquidity from and into stablecoins. This probably marks just the beginning of cryptocurrency valuations in spot markets, as even more commodities and/or tokens come to use on exchanges. Eventually, spot markets may include more notable items such as nonfungible tokens, various stablecoins connected to the price of commodities, or even just the commodities themselves.
What is an orderbook?
An order book is the electronic tool used to document and facilitate trades. In an order book there are two notable forces: bids and asks.
What are Bids?
A bid is a buying order on the left side of the depth chart of an open order, for when a price is below the immediate asking price. As suggested, bids do not necessarily have to be placed at the spot price in an orderbook. Instead, using limit orders traders place bids in lower than spot price with the expectation that the price will dip lower and the order will fill.
What are Asks?
An ask is a selling order on the right side of a depth chart for an open order, for when the asking price is above the spot price. Asks may be placed higher than the suggested spot price in a limit order in the expectation of a price rising past spot.
Parties interested in Spot Trading
Plenty of parties are interested in the spot trading price for commodities, stocks, and likewise cryptocurrencies. For instance, futures trading is a derivative based on the spot price.
For individual investors, the spot trading price is often valued as the most notable since it is the price at which the cryptocurrency can be obtained immediately.
OTC (Over the Counter) crypto traders will often base their prices around the spot market’s price. Also, OTC crypto desks may decide to acquire at or around the spot market’s price to fulfill their client’s needs.
Considerations on Trading in a Spot Market
While trading in a spot market, it is important to trade on pairs with high liquidity. Higher liquidity means a higher chance of your order being filled. This is important for those with large orders. It is also important for the general satisfaction of smaller traders in that their smaller orders will fill more immediately as well.
While spot trading is considered immediate, the fiat used to buy the commodity or cryptocurrency must clear on the exchange before purchase or withdrawal from the exchange. That is to say, it takes a while for the traditional banking system to move the money a trader wishes to use to buy the crypto.
Next, choose an exchange that allows you to easily take custody of the cryptocurrency you purchase. While a great majority of exchanges allow you to take custody (i.e. move the currency from an exchange to a wallet), some (e.g. Robinhood and Paypal) do not.
Take consideration of both exchange fees, and network transaction fees. Most exchanges will take a small fee on each trade. While some exchanges will charge just the transacting fee to move the cryptocurrency, others make significant charges on niche cryptocurrencies (e.g. Binance).
Get Started With Spot Trading
To engage in spot trading, open an account with an otc broker. While it may take some research, finding the right exchange is not too difficult. Most exchanges make trading in the cryptocurrency spot market very simple.