By James Davis
Over the last few years, digital assets have witnessed massive adoption, and this is evidenced by traditional asset management firms that are now adding crypto to their portfolios.
There are various methods for purchasing and selling cryptocurrencies, including futures, spot, and options. In this article, we will focus on spot trading, the most used method by crypto traders.
What’s a Crypto Spot Market?
A crypto spot market facilitates the buying and selling of digital assets instantly. Those who trade in this market usually buy cryptocurrencies such as Bitcoin and Ethereum and then sell them when their value appreciates.
Every centralized crypto exchange that allows users to access spot markets has an order book containing ask prices from sellers and bid prices from buyers. An ask price is simply the lowest price a particular seller is ready to accept as payment for their digital asset. On the other hand, a bid price represents the highest price a buyer is willing to pay.
Now this is how the order book functions. Let’s say you are looking to buy Bitcoin for $29,000, so you place an order in the spot market, which then goes to the order book’s bid price. If a seller is willing to sell their BTC at that price, then your order gets filled automatically.
What’s Crypto Spot Trading?
As mentioned before, the main goal of every trader participating in the spot market is to buy low and then sell high. However, due to high volatility, there is no guarantee that the purchased asset will rise in value.
In spot markets, the current value of a particular crypto is known as the spot price. This price changes regularly as old orders are filled, and new ones are placed. It is worth mentioning that although spot markets are intended to execute orders instantly, it is never the case in some crypto exchanges as they lack enough liquidity to fill those orders on the spot.
Does spot trading require traders to conduct technical and fundamental analysis? Yes! Since the aim is to buy cheaply and sell high, a proper analysis helps traders determine the next price movement before placing a buy order.
Both centralized and decentralized exchanges support spot trading. The big difference is that there is no order book in the latter. Also, spot trading fees vary from one platform to another.
Advantages and Disadvantages of Crypto Spot Trading
Purchasing a digital asset on a spot market makes you a true owner of that crypto. Therefore, you can use it as you please. For example, you can decide to stake it to earn rewards or use it to make online payments.
Furthermore, spot trading is considered less risky compared to margin trading. That is, you can trade cryptocurrencies without having to worry about margin calls.
However, one of the biggest disadvantages of spot trading is lower potential gains than those expected in margin trading.
How to Spot Trade on Binance
Spot trading on Binance is super simple. But to do this, you need to open an account with the platform. After verifying it, you can then start crypto spot trading. Here is how to go about it:
Step 1: On the Binance platform, click “Trade” then “Spot” on the page that opens. Once you do this, you will be directed to the spot trading platform that features a price chart, order book, and other trading tools.
Step 2: On the top-left of the page, you can search for any crypto trading pair and check its historical price data, along with other vital information that can help you make a good trading decision.
Step 3: After selecting the pair you wish to trade, you can place three types of orders: stop-limit, market, and limit orders.
Step 4: Once your order goes into the order book, it will be filled when another trader matches your price.
Futures Trading Vs. Spot Trading
While transactions are settled instantly in spot trading, contracts entered in the future markets are usually paid for on a future date when a seller and a buyer agree to trade a certain digital asset at a predetermined price.
Conclusion
Spot trading is suitable for beginner traders. However, like any other crypto trading method, it also carries some risks, so only invest what you are willing to lose.