Spot Trading is the process of buying or selling digital currencies at their current market prices. It is basically buying at prevailing market prices and selling it at a much better and higher price to get a high trading profit.
When compared to margin or futures trading, in which traders put their bet on upward or downward movement of the prices, spot trading gives the chance to buy and sell the cryptocurrencies at their actual price, which enables quick ownership and settlement of cryptocurrencies to buyers. Spot trading is used by new traders because of its simplicity in character.
In this article, we will look at the workings of spot trading in crypto, the different pros and cons of crypto spot trading, and, finally, whether or not it is profitable.
How Does It Work?
Spot trading is the process of trading cryptocurrencies on an exchange at their current, or spot price. Transactions are executed as soon as the trader places a buy or sell order. The cryptocurrency is sold or bought instantly.
This is also the difference between spot trading and futures or options trading, where trades are made by determining the future price of a cryptocurrency. The first thing to get started with the spot trading process is to choose a platform, set up an account for yourself, and then transfer the other currencies or the fiat currency to the wallet then choose the crypto pair that wanted to trade and place the order. By placing this order this will be matched with the corresponding order in the order book, finally leading to receiving the acquired crypto in their account.
Types Of Crypto Spot Trading
There are different types of crypto spot trading which include centralized exchanges, over-the-counter trading, and peer-to-peer trading
- Centralized Exchanges: It is an intermediary that allows the users to connect without much hassle. It provides a safer environment for the users to exchange cryptocurrency and fiat currency.
- Over-The-Counter (OTC) Trading: It is the trading of financial materials between two groups that will have a broker or a dealer in the middle. This will usually happen in a financial marketplace called the Over-The-Counter market.
- P2P Trading: Peer-to-Peer (P2P) Trading is the sharing of data or any type of information between two groups without any interference from a third party, it is completely formed in a decentralized environment.
Pros And Cons
Spot trading has both sides of pros and cons, which makes it very important to understand both sides before entering into this trading method.
Pros
- It is ideal for beginners, but it is a little complicated for a newcomer to the world of crypto trading.
- Because of the above-mentioned reason, there is also the low risk factor which is one of its best advantages. You do not necessarily need to worry about liquidation risks associated with leverage.
- It supports a long-term keeping idea which is very suitable and applicable in crypto.
- Spot trading is conducted on exchanges. Wallets are only for safekeeping crypto.
- It shows real-time prices and market supply which gives you a more clear picture of what is happening in the spot market.
Cons
- When compared to other trading strategies spot trading does not provide any leverage, which limits the profit potential.
- Future trading is where traders can profit from falling prices because they bet on them. Spot trading is exiting or entering the market when prices are high or low.
- It demands constant observation of the market timing.
- It gives a more simple use of trading which limits its potential on the side of advanced strategies.
- Not suitable to execute larger trades.
Is Crypto Spot Trading Profitable?
Even though spot trading has given a lot of profits to the traders, it is very important to understand that getting a profit is always not guaranteed. It depends on various factors, which consist of the knowledge of the user, getting to know better strategy, knowing the market conditions, also about how managing the risk handling skill.
Understanding the conditions of the market, trends, and the news is very essential. Keeping up with the developments and understanding what is happening in the blockchain space will help you to make effective decisions in trading.
There isn’t much talk happening on the factor of psychological matters. Being in emotional discipline plays an important role. Try to avoid quick decisions based on constant thoughts that come from greed or fear.
Everyone knows that cryptos are prone to volatility, which is a coin of two sides based on risk and opportunities. Understanding the quick changes and analyzing past performances can give the users an idea of how the performance of the crypto.
