Cryptocurrencies have come to stay. Since the creation of Bitcoin, the market capitalization for cryptocurrencies has rapidly exploded, while the number of venues where users can trade them has significantly increased.
Cryptocurrency trading on an exchange is the quickest way to cash in on digital assets. It makes it easy for users to buy and sell them at will. Cryptocurrency trading is defined as the act of buying and selling digital assets for the sole purpose of making profits from them. It is simply buying crypto and holding for some time, with hopes of appreciation in value.
Trading cryptocurrencies involves conscious steps, steps that you must put in place to succeed in the venture. A trader should have a trading strategy for optimum, profitable trading. You should also have a plan when trading, including an exit strategy, risk management plans, trading objectives, and so on. You should also decide what method you wish to use to trade the market: spot trading, futures, options, and perpetual contracts.
Spot trading is one of the popular trading methods available. This article will comprehensively explain what spot trading is, how to take spot trades, and other pros and cons of spot trading.
What is the Crypto Spot Market?
Spot trading involves buying digital assets like Bitcoin, Ethereum, etc., and holding them in expectation of price increment, after which it is sold for profit. A market that allows this instantaneous exchange of crypto assets is called a spot market.
The name “spot trading” was coined for this trading method because transactions are settled “on the spot.” The crypto spot market consists majorly of buyers and sellers. Buyers place orders to purchase a cryptocurrency at a particular price, while sellers place orders to sell off assets at a particular price. The highest price a buyer is willing to pay is called a bid price, while the lowest price a seller is willing to accept is called the asking price.
Crypto Spot Trading
Spot trading has three critical concepts; spot price, trade date, and settlement date. The current price of the asset in the market is called the spot price, this changes as new orders are filled.
The trade date records the date a transaction was carried out. The settlement date is when the asset in the transaction is moved. For most exchanges, transactions happen almost immediately.
How Crypto Spot Trading Works
A variety of digital currencies are available for purchase in the spot market. The market on exchanges is designed in such a way that you get to transact at the best possible price, this has been made possible with built-in tools for efficient trading.
To trade on Centralised Exchanges (CEXes), you must first fund your wallet with fiat and then convert them to the crypto coin you wish to buy. On Decentralised Exchanges (DEXs), blockchain technology matches buying and selling orders. Smart contracts execute spot trading strategies directly from the user’s wallet.
Things To Note About Spot Trading
- Assets purchased on spots are owned. It means that it can be held and used for other functions like staking, farming, and online payments.
- Spot trades do not offer profit padding as leveraged trades do. It means there is no profit amplification due to borrowed money from exchanges.
- Spot trades are less risky than leveraged trading and can withstand price variations and market volatility.
- Traders can transfer assets they acquire on the spot market from one wallet to another. They can also trade them on DEXs, and store them in cold wallets.
Profitability of Crypto Spot Trades
Making profits in spot trading is not instantaneous or yields quickly as some other trading methods, but it does offer capital security. Spot traders profit enormously on bull runs and can stand the volatile nature of the market.
However, due diligence must be employed while buying a digital asset so as not to invest wrongly and risk stunted profit or a capital loss. You must have a grasp of technical and fundamental analysis, you must also have an understanding of what causes cryptocurrency to rise and fall. With these in place, you are well on track to rocking spot trading.