What is Spot Trading in Crypto: Pros, Cons & How to Get Started
Have you also been wondering about an ideal way to trade cryptocurrencies but have been unable to find them? If yes, then wait and read this blog.
Here, we will discuss spot trading in crypto with examples and the process, as well as its advantages and disadvantages. This will help you in deciding whether to choose spot trading or not.
What is spot trading in crypto?
Crypto spot trading refers to buying and selling cryptocurrencies at the current market price and making profits from the price change. As the name suggests, spot trading deals with trading digital currencies on the spot at the prevailing price.
With spot trading, traders can buy cryptocurrency at a low price and sell it at a high price or sell crypto at a low and buy it at a high price and make profits from the difference.
Crypto spot trading is quite similar to forex trading. Spot traders can buy or sell crypto against any other cryptocurrency or fiat currency and make money from the fluctuation in value.
Spot Crypto Trading Example
For a better understanding, let us look at the example of spot trading crypto. Suppose the current price of Ethereum is $1,870, and a trader thinks that it will rise further against USD.
The trader opens a buy position in ETH/USD at a spot price. After a few days, when the price reached $1920, the trader decided to sell ETH. So, the profit from spot trade is $50.
How to start Crypto Spot Trading:
Spot trading is the simplest way to trade in the crypto market. And the process to start spot trading is also simple. Follow these six steps to get started on your spot crypto trading journey:
- First, learn about major cryptocurrencies, their mechanism, working, and factors affecting their market prices, and get a basic knowledge of the overall crypto market.
- Open an account with a crypto spot trading platform on which you want to buy or sell crypto. Be vigilant while selecting the platform, as it will provide you with all the trading facilities.
- Deposit trading capital to your crypto account. Watch the cryptocurrency market to identify potential buy and sell opportunities.
- Develop a spot trading crypto strategy that will work as a blueprint for your journey and define how, when, and where to place a trade.
- Decide whether you want to trade crypto against any other crypto or centralized currency.
- Place a buy or sell order in the cryptocurrency pair. Wait till the price reaches your desired level. You can also keep cryptocurrency in your trading wallet. Once the market turns in your favor, take an exit.
A quick glance
It’s useful for short-term trading, as there are no expiries on positions. You can trade utilising leverage, opening positions using margin. Remember that while this might multiply gains, it also has the potential to magnify losses.
Overall, spot trading can be a useful strategy to trade cryptocurrencies for people familiar with the risks involved who desire a simple and cost-effective way to take advantage of short-term price swings. However, it’s crucial to complete your research and understand the dangers involved before engaging in any trading.
Despite its advantages, spot trading is not without dangers or volatility. Because spot trading involves real-time transactions, there is limited space for error or delay. Traders must monitor the market closely and be prepared for the prospect of quick losses if the market moves against their positions
On the negative, spot trading can be risky due to the fluctuating nature of bitcoin pricing.
Spot markets can arise wherever there is an infrastructure to carry out such a trade. An example of a spot market trade is when an investor (Mr. John) wants to acquire 1,000 IBM shares on the New York Stock Exchange (NYSE). He will contact his broker to buy the shares at the existing market price, say $117.60
Pros and Cons of Crypto Spot Trading:
Excited to start spot trading in crypto? Wait. Like any other strategy, crypto spot trading has positive and negative sides. Let us look at them so you can take maximum benefits and manage the limitations accordingly:
Pros:
Cryptocurrency Ownership: Ownership is the core feature that differentiates spot trading from the other methods. Spot trading allows traders to own the digital asset.
Once spot trade is executed, traders can enjoy ownership and store the crypto in their wallets. Traders can use crypto for other purposes, such as as collateral or buying other crypto or financial instruments.
Excellent Liquidity: Liquidity defines the ease of entering or exiting a trade. High liquidity allows traders to open or close a trade at a desired price quickly. The Spot market has a large number of buyers and sellers, resulting in excellent liquidity.
Best For Short-Term Traders: Spot trading allows traders to take advantage of short-term price movements. Traders can enter and exit a trade in seconds, minutes, or hours. So traders with short-term trading strategies, such as crypto scalpers and day traders, can surely go for spot trading.
Leverage Facility: Leverage allows traders to open a trade much larger than the trade capital. When trading in cryptocurrencies, most strategies require significant capital, and not every trader has one.
Spot trading allows traders to take advantage of leverage and margin trading. Crypto spot traders can get up to 1:100 leverage, which means that with 10$ capital, a trader can open a trade worth $1000.
Low Trading Fees: Spot trading fees differ from platform to platform. However, the method is more cost-competitive than the other ones overall. Generally, the commission for spot trading lies between 0.1 to 0.5%, which is relatively low.
Cons:
Market Volatility and Risk: The crypto market is highly volatile, which means cryptocurrency observes significant price rises and falls. High volatility means high risk, and traders can suffer significant losses. Even with crypto spot trading, the risk and volatility are high.
Crypto Storage Security Issues: Spot trading transfers cryptocurrency ownership to the trader. To store cryptocurrency, traders need to have a crypto wallet.
Crypto wallets are developed based on highly advanced and secure technologies. However, even after that, crypto theft and hacking can occur.
Less Flexibility: Spot trading is less flexible than CFD or contract-based trading. CFDs allow traders to make profits without owning the underlying crypto, giving traders much more flexibility.
Meanwhile, options and futures trading allows traders to buy or sell cryptocurrencies at predefined dates and prices. However, with spot trading, traders do not get that much flexibility.
Price Manipulations: Big players can manipulate market conditions under spot trading. It results in sudden drops or rises in cryptocurrencies. During such scenarios, spot traders may face issues predicting the rise and fall and suffer significant losses.
Bottom Line
Spot trading in crypto is an excellent way for beginner, intermediate, and advanced traders. Traders can trade with little capital, simple strategies, and limited resources.
However, whether you talk about spot trading or any other way, knowledge is the most important to get success. Spot trading also involves the risk of losing, and the risk is higher when you lack knowledge.
So, the first thing you need to do is enhance your knowledge of spot trading. Market Investopedia is a great learning platform. Join us and get valuable trading resources today.