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- 1 Spot trading is the most fundamental method of buying and selling cryptocurrencies.
- 2 Traders must understand this simple practice before becoming an active market participant.
Cryptocurrencies have brought forth a new avenue for trading. It has given a chance to investors to look beyond traditional investments. The blockchain-based assets have emerged as promising investment vehicles that deliver short-term and long-term gains. However, to make the most of it, traders need to buy and sell it most opportunistically.
Spot trading is one popular method that could bear profits if done wisely. It is also one of the commonly used trading strategies by crypto investors. In essence, it is the buying and selling of crypto assets instantly. However, there are many aspects related to it that new traders must understand. So let’s dig into it and see what this widely-practiced trading method unveils.
Spot Trading: The Gist
In a spot market, orders are settled immediately. So, if someone wants to buy Bitcoin in exchange for dollars, or any other crypto, they place the order through an exchange and the platform takes payment and transfers the coin then and there. In a way, it is considered the most ideal and simplified environment for doing the trade.
However, one must understand that markets are complicated and so is the trading. So, many other methods of trading exist in the market. As mentioned above, spot trading is the simplest form of trading because it settles transactions “on the spot.” This trading environment involves a few crucial actors which are sellers, buyers, and order books.
Furthermore, it works with an easy sequence which makes the system more convenient. It all begins with the sellers/buyers placing their orders on the exchange platforms with a specific bid/ask price. The ask price is the lowest rate at which the seller is willing to sell the assets. Similarly, the bid price is the highest rate at which the buyer is ready to accept the deal.
That’s where the order book plays its role. It records the order from buyers as well as sellers, i.e., the ask and the bid. For example, if Mr. X places an order to buy BTC, the transaction will be tallied from “bids” of the order book. Also, the mechanism automates the whole thing and validates the order with the same specifications.
When Mr. X places an order to sell BTC, the transaction continues to the ask side of the order book. Usually, the purchasers are represented with a green color and the sellers are indicated with a red color.
Spot Trading Mechanism Up Close
No matter what the method is, the traders’ motto is to make a profit. To make sure that it happens, they strategize every step. Moreover, there are other factors to consider like volatility and incidents that cause price fluctuation. In spot trading, three elements play a vital role in ensuring profits. They are:-
- Spot Price
- Trade Date
- Settlement Date
Spot price is the market price, trade date is the day when buy/sell happens, and settlement date is the day when the order is fulfilled. Traders can do spot trading on every exchange because it’s the most basic form of trading. Notably, spot prices are dynamic and they keep changing. It reflects the placing of new orders and the fulfillment of old ones.
When the trade initiates, transactions are recorded and markets execute the trade. Furthermore, the coins are transferred on the settlement date which is also called the spot date. In traditional markets, there could be a difference of several days between the trade date and the settlement date.
In the crypto market, however, the trade and settlement mostly happen on the same day. Exchanges try to get their buyers and sellers the best available spot price through a market order. With a spot market, traders get to deal with different cryptocurrencies and even fiat currencies. The trading platforms also offer various methods for buying and selling assets.
To make trading decisions, market participants use technical and fundamental analysis. When it comes to places for making trade, investors get a few choices in the crypto sphere. They can do it either on a centralized exchange, decentralized exchange, or on an over-the-counter market. Before beginning the investment journey, traders must fund their accounts.
The centralized exchanges charge fees on many trading activities, trades, and listings. The decentralized exchanges keep their operations fully on the blockchain. They use smart contracts to lock every transaction and offer self-custodial wallets as well. Above all, DEXs allow the users to skip the KYC to keep their identity undisclosed.
Upshot
Crypto investors can make the most of this practice by knowing the basics of spot trading. With a little knowledge and active involvement, they can utilize spot trading in the best way. Nevertheless, to become an expert, they must explore other methods as well. This multifaceted approach is always a better strategy for traders seeking profits.
Andrew is a blockchain developer who developed his interest in cryptocurrencies while pursuing his post-graduation major in blockchain development. He is a keen observer of details and shares his passion for writing, along with coding. His backend knowledge about blockchain helps him give a unique perspective to his writing skills, and a reliable craft at explaining the concepts such as blockchain programming, languages and token minting. He also frequently shares technical details and performance indicators of ICOs and IDOs.
