Spot trading is a fundamental method of investing in cryptocurrency, commonly used by new traders and investors.
Spot trading involves purchasing cryptocurrency assets and holding onto them until their value increases, with the expectation of selling them for a profit. Unlike other trading methods, such as margin trading, spot trading only allows traders to buy as much as they can afford to lose, making it a relatively safer option.
Profit is gained in spot trading by purchasing assets at a low price and waiting for their value to increase before selling them. This method of investing can take years, but patient traders who dollar-cost-average into their favorite cryptocurrencies often see good returns.
It’s important to keep in mind that profits are only realized when the cryptocurrency is sold for fiat currency or a stablecoin. Additionally, spot trading differs from buying because it only allows traders to use their existing capital and does not permit borrowing money from a brokerage or exchange.
Types of Cryptocurrency Spot Markets
There are two primary types of spot markets for cryptocurrency. The first is the exchange, which brings together supply and demand in a single platform, allowing for quick buying or selling of assets at market prices. Through order books, traders can also access information on how to trade bitcoin, the availability of Bitcoin, and market liquidity.
The second type of spot market is known as over-the-counter (OTC) trading. Unlike exchanges, OTC trades occur directly between buyers and sellers without the involvement of a third party or trading platform. This means that the parties can negotiate the terms of the trade, including the price, which can be either above or below the market rate.
OTC trading is popular due to its ability to facilitate the negotiation of multiple items beyond the price. For instance, it is a viable option for purchasing a large amount of cryptocurrency without causing market volatility, which is often a concern when buying in open markets.
Spot Trading Risks: What Traders Need to Know
Spot trading can come with several risks that traders need to consider before investing. One of the primary risks is liquidity, which can dry up over time, especially during bear markets. As a result, smaller altcoins may lose liquidity, making it challenging to sell tokens at a fair market price. This can force traders to sell their assets at a lower price or hold onto their investments.
Another risk arises when trading commodities on the spot market. For instance, when you purchase crude oil on the spot market, you will have to take physical delivery of the product. This means that actual crude oil will be delivered to you, which can be inconvenient and expensive.
Additionally, since spot trading does not allow for margin, your profit potential is limited. This means that you can only invest with the capital you have, which can limit your ability to make significant profits.
The Benefits of Spot Trading
At the same time, the lack of margin in spot trading protects you from losing more capital than you want to. Spot trading is one of the safest ways of investing, allowing you to hold onto your investments without much worry.
Prices of the spot market are very transparent because it is purely based on supply and demand. When trading other instruments, such as derivatives, futures or options, there are multiple other factors influencing price, such as time.
Because spot trading allows you to own assets outright, you do not have to worry about interest payments or maintenance margins. It allows you to buy Bitcoin in 2023, forget about it for a few years, and come back to sizeable profits in 2028 (not financial advice).
Leave A Reply