Spot trading involves the direct purchase or sale of financial instruments and assets such as cryptocurrencies, forex, stocks, or bonds.
The delivery of the asset is usually immediate. Spot trading takes place on spot markets, which are either on-exchange or over-the-counter (directly between traders).
When trading on cash markets, you can only use assets that you own – there is no leverage or margin.
Centralized exchanges for spot trading manage regulatory compliance, security, custody, and other factors to facilitate trading. In return, exchanges charge transaction fees. Decentralized exchanges offer a similar service but via smart blockchain contracts.
Spot trading offers an easy way to invest and trade. When it comes to cryptocurrency investing, your first experience will likely be a spot transaction in the spot market, e.g. buying BNB at market price and HODLing.
Cash markets exist across multiple asset classes, including cryptocurrencies, stocks, commodities, forex, and bonds. You are probably more familiar with spot markets and spot trading than you think.
Some of the most popular markets, like NASDAQ or NYSE (New York Stock Exchange), are cash markets.
What is a spot market?
A spot market is a publicly accessible financial market where assets are traded instantly. A buyer buys an asset from a seller using fiat currency or another medium of exchange. Delivery of the asset is usually instant, but that depends on what is being traded.
Spot markets are also known as spot markets because traders make upfront payments. Cash markets come in a variety of forms, and third parties called exchanges often facilitate trading. You can also trade directly with others in over-the-counter (OTC) trading. Let’s get into that later.
What is spot trading?
Spot traders try to profit from the market by buying assets and hoping they will appreciate in value. They can later sell their assets in the spot market to make a profit if prices rise.
The current market price of an asset is called the spot price. A market order on an exchange allows you to instantly buy or sell your holdings at the best available spot price.
However, there is no guarantee that the market price will not change during the execution of your order. It may also be that there is not enough volume to fulfill your order at the desired price.
For example, if your order is 10 ETH at spot price, but only 3 are offered, you need to fill the rest of your order with ETH at a different price.
Spot prices are updated in real-time and change when orders match. OTC spot trading works differently. You can guarantee a fixed amount and price directly from another party with no order book.
Depending on the asset, delivery is immediate or typically within T+2 days. T+2 is the trade date plus two business days.
Traditionally stocks and shares required the transfer of physical certificates. The forex market is also used to transfer currencies through physical money, wire transfer, or deposit. With digitized systems, delivery is now almost instantaneous.
However, crypto markets operate 24/7, allowing for generally instantaneous trading. However, with peer-to-peer or OTC trading, the delivery may take longer.
Exchange vs. over-the-counter
Spot trading is not limited to just one place. While most people spot trade on exchanges, you can also trade directly with others without a third party.
As previously mentioned, these sales and purchases are referred to as over-the-counter negotiations. Each spot market has its own differences.
Exchanges come in two forms: centralized and decentralized. A centralized exchange manages the trading of assets such as cryptocurrencies, forex, and commodities.
The exchange acts as an intermediary between market participants and as a custodian of traded assets. To use a centralized exchange, you need to fund your account with the fiat or cryptocurrency you want to trade.
A reputable centralized exchange needs to ensure transactions run smoothly. Other responsibilities include regulatory compliance, KYC (Know Your Customer), fair pricing, security, and customer protection.
In return, the exchange charges fees for transactions, listings, and other commercial activities. Because of this, exchanges can benefit from bull and bear markets as long as they have enough users and trading volume.
A decentralized exchange (DEX) is another type of exchange that is most common with cryptocurrencies. A DEX offers many of the same basic services as a centralized exchange.
However, DEXs combine buy and sell orders through the use of blockchain technology. In most cases, DEX users do not need to create an account and can trade directly with each other without having to transfer assets to DEX.
Trading occurs directly from traders’ wallets via smart contracts. These are self-executing pieces of code on a blockchain.
Many users prefer the experience of a DEX as it offers more privacy and freedom than a standard exchange. However, this comes with a trade-off. For example, the lack of KYC and customer support can be an issue if you’re having trouble.
Some DEXs use an order book model, like the Binance DEX. A more recent development is the Automated Market Maker (AMM) model such as Pancake Swap and Uniswap.
AMMs also use smart contracts but implement a different model for price determination. Buyers use funds in a liquidity pool to exchange their tokens.
The liquidity providers that provide the pool funds charge transaction fees to anyone using the pool.
Over the counter
On the other hand, we have over-the-counter trading, sometimes known as over-the-counter trading.
Financial assets and bonds are traded directly between brokers, dealers, and dealers. Spot trading in the OTC market uses various methods of communication to organize trading, including telephone and instant messaging.
OTC trading has some advantages as it does not have to use an order book. If you are trading an asset with low liquidity, such as small-cap coins, a large order can lead to slippage.
The exchange often cannot fully fulfill your order at the desired price, so you must accept higher prices to complete the order. Because of this, large OTC trades often fetch better prices.
Note that even liquid assets like BTC can experience slippage if orders are too large. Therefore, large BTC orders can also benefit from OTC trading.
What is the difference between spot markets and futures markets?
We mentioned earlier that spot markets make instant trades with near-instant delivery. On the other hand, the futures market has contracts that will be paid at a future date.
Buyer and seller agree to trade a certain amount of goods at a certain price in the future. When the contract expires on the settlement date, the buyer and seller typically settle in cash rather than deliver the asset.
What is the difference between spot trading and margin trading?
Margin trading is available on some spot markets, but it is not the same as spot trading. As mentioned earlier, spot trading requires you to buy the asset outright and receive delivery immediately.
On the other hand, margin trading allows you to borrow funds from third parties against interest, which allows you to take larger positions.
As such, the loan gives a margin trader the potential for more meaningful profits. However, it also amplifies potential losses, so you should be careful not to lose your entire initial investment.
How to spot trades on Binance
Spot trading on Binance is a simple process once you sign up for a Binance account. Let’s take a look at Binance’s classic exchange view and explore how to place a spot trade.
You can find the trading platform by hovering over [Trade] and clicking [Classic] on the Binance homepage. You can also access more trading tools by clicking [Advanced].
You will now see the classic trading view, which contains some interesting areas.
1. This option allows you to select the cryptocurrency pair that you want to trade on the spot market. You don’t just have to buy cryptocurrencies with fiat currency. You can also exchange them for other coins and tokens on the spot market.
2. Here you can see the chart view with customizable historical price data. Embedded within the window is TradingView which offers a wide range of technical analysis tools to use. If you want to learn some basic trading techniques, check out our guide here.
3. The order book lists all open buy and sell orders for an asset sorted by price. Green orders are buy orders and red orders are sell orders. When you place a market order to buy an asset, you accept the lowest price offered. If your order still needs more volume to fill, it will be moved to the next lower retail price.
4. In this section you create your buy or sell orders. You can see that you are currently in the [Spot] area. Below you can choose between [Limit], [Market], [Stop-Limit] and [OCO] orders.
You can also use Spot Grid’s trading tools to profit from volatile markets.
Let’s take a look at the simplest spot trade you can do: a market order. In our example, you want to buy $1,000 (BUSD) in Bitcoin (BTC).
All you have to do is enter 1,000 in the [Total] field and click [Buy BTC]. The exchange immediately delivers the BUSD to the seller and you receive $1,000 (BUSD) in BTC.
Advantages and disadvantages of the spot market
Each type of trade and strategy you will come across has its pros and cons. By understanding this, you can reduce risk and trade with more confidence. Spot trading is one of the simplest, but it still has strengths and weaknesses.
Advantages of spot markets
1. Prices are transparent and depend only on supply and demand in the market. This is in contrast to the futures market, which often contains multiple reference prices.
For example, the token price on Binance’s futures market is derived from other information, including the funding rate, the price index, and the moving average (MA). In some traditional markets, the brand price can also be influenced by interest rates.
2. Spot trading is easy to commit due to its simple rules, rewards, and risks. If you invest $500 in the BNB cash market, you can easily calculate your risk based on your listing and the current price.
3. You can “set and forget”. Unlike trading derivatives and margins, with spot trading, you don’t have to worry about being liquidated or getting a margin call.
You can enter or exit a trade at any time. You also don’t have to constantly review your investment unless you want to make short-term trades.
Disadvantages of spot markets
1. Depending on what you trade, spot markets can leave you with assets that are impractical to hold. Commodities are perhaps the best example. When you buy crude oil, you must physically receive the asset. With cryptocurrencies, holding tokens and coins puts you in charge of keeping them safe and secure. When trading futures derivatives, you can still gain exposure to these assets but settle in cash.
2. With certain assets, individuals, and companies, stability is valuable. For example, a company wishing to operate abroad must have access to foreign exchange in the foreign exchange market. If they depended on the spot market, the spending and revenue planning would be very unstable.
3. Potential gains in spot trading are much lower than in futures or margin trading. You can use the same amount of capital to trade larger positions.
Spot trading on spot markets is one of the most common trading methods for people, especially beginners. While simple, it’s always good to have some additional knowledge about its ins and outs and potential strategies. Beyond the basics, consider combining your knowledge with solid technical, fundamental, and sentiment analysis.