What is Spot Trading? how does it work in cryptocurrency?

What is Spot Trading? how does it work in cryptocurrency?

  • Spot trading is nothing but buying and selling assets on the spot 
  • In cryptocurrency, many exchanges allow spot trade

What is a Spot Trading ?

Spot trading is also known as spot transaction. Spot trade users trade foreign currency, financial instruments, and other commodities for instant delivery. In simple terms, spot trade is nothing but the purchase and sale of foreign currency. The special feature of  spot trade is that the securities are traded for immediate delivery in spot trading. Most of the spot transactions can take place over an exchange or sometimes over the counter.

The spot price is the current price of any financial instrument. It is the exact price at which a financial instrument can be bought and sold. The foreign exchange market is the biggest market around the world because it has a volume of $5 Trillion of currency traded daily.

Spot Market in Cryptocurrency

A spot market is a good place for traders to exchange their cryptocurrency for fiat currency or any other cryptocurrency. Crypto trading is the process of purchasing and selling cryptocurrency. Crypto transactions are of three types: futures, options, and perpetual contracts. Spot trading is very common in the crypto market. here traders buy cryptocurrencies in the hope of selling them at a higher price.

The spot market is the market in crypto in which cryptocurrencies are instantaneously trade and settle. The reason why it is called a spot market is because transactions are settle on the spot.

The ultimate aim of spot trade is to buy at a low price and sell at a much higher price. Unfortunately, this tactic does not work every time.

The spot price trade date and the settlement date are the three crucial concepts in spot trade .

The spot price

It is the current price of any asset. It is the price at which traders can immediately sell their assets or buy new assets. Investors can do this trade on any of the popular crypto exchanges.

The trade date – It records the exact date on which the transaction took place.

The Settlement date – It is the date on which the transactions take place in actuality. Hence it is also called the spot date.

It heavily depends on the exchange we use and the time our transaction takes. Most of the crypto transactions take place on the same day if a good exchange used.

Investors can also spot trade on any centralized exchange, decentralized exchange, or even over-the-counter markets. 

Smart contracts have enabled spot trade to directly done from your crypto wallet. DEX uses blockchain technology to trade. This trading can also done through brokers on behalf of their clients or even over the phone.

Pros and Cons of Spot Trading

Spot trade can also be use by trades to use their cryptocurrency assets for functions like online payments and also staking.

Spot trade is also less risky than margin trading.

The cons of spot trade is that it does not offer the advantages of the potential return amplifications that are very common in margin trading. 

The leverages in spot trade are significantly lower than that of margin trading.