Spot trading is one of the most common cryptocurrency trading and investing methods. ETF fund managers, responsible for most of the market activity by volume over the past two years, use spot trading in crypto.
Top Forex Brokers
Spot trading differs from derivative trading in crypto, and traders must understand the spot market to ensure they apply the appropriate strategy. Read my explanations below and learn about spot trading versus other types of trading like CFDs, futures, and options.
An Overview of Spot Trading in Crypto
Spot trading in crypto refers to buying and selling cryptocurrencies at current market prices. Traders and investors buy or sell using a cryptocurrency exchange, cryptocurrency broker, or peer-to-peer exchange, and the transaction settles immediately or on the spot, hence the name spot trading. The ownership requires storage, which can increase costs and risks, and spot trading is without leverage.
Therefore, it suits some select strategies but is unsuitable for others. Long-term buy-and-hold investors benefit from spot trading in crypto, while derivative trading is ideal for short-term traders.
How Spot Trading in Crypto Works
1. Educate yourself about cryptocurrencies.
2. Open an account with a decentralized exchange.
3. Pass verification.
4. Fund your account.
5. Analyze cryptocurrencies using your preferred method.
6. Enter your order.
7. Monitor your investment and make necessary changes as appropriate.
Understanding the Spot Market
The spot market offers real-time pricing of cryptocurrencies and allows market participants to buy and sell cryptocurrencies at current market prices or on the spot. It only suits investors who seek ownership of the underlying asset and traders who accept the absence of leveraged trading.
Spot Trading vs. Other Trading Types Like Futures or Options
Cryptocurrency traders and investors must understand the differences between spot trading in crypto and derivative trading to know which strategy to use, how to manage risk, and comprehend the disadvantages of spot trading in crypto.
Here is what you need to know about spot trading in crypto versus derivative trading:
- Spot trading in crypto grants physical ownership of the underlying asset at the current market price
- CFD trading allows traders to benefit from price movements without taking ownership of the underlying asset, eliminating storage and risk of theft
- Futures trading legally binds contract holders to make a physical delivery of the underlying asset at a future price and date
- Options trading grants the option but not the obligation to take ownership if the market price triggers the options put or call price during the specified contract time
- Spot trading in crypto is unleveraged and increases the capital requirements, making smaller portfolios uneconomical
- Derivative trading involves leverage, which requires in-depth knowledge of risk and trade size management
Spot Trading in Crypto – Pros and Cons
Before engaging in cryptocurrency spot trading, traders must consider the pros and cons of spot trading in crypto.
The Pros of Spot Trading in Crypto
- The transaction settles immediately
- Instant ownership transfer
- Staking possibility
- Store of wealth approach
- No margin calls
- Real-time pricing
- Decentralized trading
The Cons of Spot Trading in Crypto
- Ownership requires storage
- No leverage
- Higher capital requirements
- Cybersecurity risks from hackers
The Risks of Spot Trading in Cryptocurrencies
The risks of spot trading in crypto start with the lack of education and knowledge. The storage requirement increases the risk of theft, and the lack of leverage increases capital requirements, elevating the risk of inefficient portfolio and capital management. The lack of knowledge, uncompetitive trading conditions, and inadequate trading infrastructure also exist.
My Take
Spot trading in crypto is the least efficient method of buying digital assets, but it is the only one that grants ownership of the underlying asset. Therefore, it is ideal for long-term buy-and-hold strategies but less suited to the needs of short-term traders.
