Cryptocurrency has been the best performing asset of the past decade. A lot of people are now trying to jump on the crypto train because of this. There are a lot of ways to get into crypto, one of which is spot trading. If you’ve been trading with stocks before, you probably know what spot trading is. But what is spot trading in crypto? Read on so you can find out!
Crypto Spot Trading
A spot trading market is where people buy and sell their cryptocurrency. Exchange platforms are one of the spot trading markets out there. One of the characteristics of spot markets is how quickly trades happen. If a bid and an ask have an equivalent value, an exchange is immediately processed.
It is almost the same as other spot markets like stocks, commodities, and currencies. However, crypto-assets spot trading happens 24/7. It doesn’t close at all. You can trade all day, and most exchanges also allow depositing and withdrawing your funds all day long.
How Crypto Spot Trading Works
Now that we know the basics of what is spot trading in crypto, let’s now find out how it works. A buyer puts in a bid price that signifies the buyer’s trade value for a crypto asset. On the other hand, a seller puts in an asking price, which is the price they are willing to sell a crypto asset for. All orders, both ask and bid, are all listed and placed in an order book.
Order books are the books where exchanges list down all current ask and bid offers in the exchange. Crypto markets are open 24/7, so the order book is always updated every time a trade happens. Most exchanges would have multiple order books for a crypto asset with various trading pairs. You have to be familiar with the order book to understand what is spot trading in crypto.
Buyers would want to buy crypto at the lowest price possible, and sellers would like to sell for the highest potential value. With two values pulling in different directions, there will always be a gap. That gap is called the market spread.
The market spread is based on the lowest price sellers ask, and the highest price buyers bid. To compute it, get the difference between the lowest ask offer minus the highest bid offer. The market spread shows the boundary in which no one is willing to sell a crypto asset lower than that, and no one is willing to buy a crypto asset higher than that value. Understanding the marker spread is a step forward in knowing what is spot trading in crypto.
The market spread can be super tight or very wide. A wide market spread can signal a problem within the exchange. Buyers are buying crypto-assets at a higher price, and sellers are selling less for the amount of their crypto assets. Trading should not be done frequently if the market spread is too wide. If the market spread is too wide and you trade often, you might lose some money instead of earning profits.
Now that we know what spot trading in crypto is, let’s look at some other ways to trade crypto assets. One of which is futures trading. Futures trading is when you trade not the crypto-assets themselves, but you are trading contracts of the crypto assets. These contracts follow the prices of the crypto assets meaning as the value of crypto moves up or down; the agreement’s value also moves along with it.
Futures trading, unlike spot trading, delivers the crypto on a set date in the future. This is useful in crypto trading markets since crypto markets are extremely volatile markets, and using future contracts secures profits in the future.
One downside of futures trading is the counterparty risk. Unlike in spot trading, where the buyer and seller are active simultaneously, the trade is processed at the mutually agreed price. Counterparty risk is when the other side of the contract defaults the obligation on the contract. This can happen in futures trading, but of course, there are some safeguards in place to avoid it from happening.
The first is the performance bonds. These are crypto assets in the wallet that can cover trade obligations. The second is a maintenance margin, which should be enough to cover all open positions. Learn more about crypto trading here!
Cryptocurrency trading is definitely on the rise, and of course, everyone wants to gain some profit. If you plan on doing some trading on your own, please educate yourself before going into anything that will cost your money. If you don’t know what is spot trading in crypto before you read this article, hopefully, you learned a lot from us.