A direct interaction between sellers and buyers is considered by many economists the purest form of the financial market. While elitists are concerned with larger profits and advanced financial instruments, traders equipped with nuanced knowledge of fundamental analysis and economics enjoy apparent benefits of spot trading.
What is a spot market? What are its benefits and disadvantages? Spot, as the name suggests, means that you make purchases on the market without any intermediaries at a publicly announced price as you “spot” it in listings. Several important conditions must be met for a spot deal to take place:
- The seller must own the asset listed on the market;
- The buyer must pay in fiat or other assets on the spot.
Since all deals are executed without intermediaries, you do not enjoy the benefits of marginal trading but you also don’t have to concern yourself with additional risks. Often, traders underestimate the danger of trading with leverage and lose significant portions of their capital, and even take on debt.
To define the spot market, we have to highlight its advantages for traders. It is an especially interesting topic to crypto enthusiasts. Spot trading had its own limitations due to the nature of assets traded as the execution of deals took up to 2 days (depending on the type of the spot deal). However, the advent of online trading and digital assets such as cryptocurrencies made spot trading crypto nearly instantaneous.
Traders focusing on spot trading crypto take advantage of its three defining aspects:
- High volatility of cryptocurrencies;
- Visible and verifiable availability of assets of the market;
- Immediate sales and purchases.
Despite the lack of financial leverages, high volatility and liquidity allow experienced traders to extract significant profits using spot markets. copy trading crypto
Different types of spot deals
While the mechanic of any spot deal is quite simple, some important considerations involve settlement time. For example, the transaction of payment takes place on the spot but delivery may be delayed due to logistical or bureaucratic reasons. Some assets accrue value over time and it should be taken into consideration by the market.
Depending on the chosen settlement time, you may find yourself using one of the following types of spot trades:
- TOD is derived from “today” meaning that the settlement will be done by the end of the day.
- TOM is derived from “tomorrow” meaning that the settlement will take place on the next day.
- SPT is derived from “spot” meaning that the settlement will be done in T + 2 days where T is the day of the deal.
Since the evaluation of assets changes over time, spots with 2 business day settlement date cost more compared to TOD and TOM.
What is a spot buy?
It is a regular purchase on the spot market with two distinct conditions that must be met by the settlement date:
- The seller must be an owner of the sold asset and transfer ownership to the buyer;
- The buyer must become the sole owner of the asset at the end of the transaction.
It is important to note that in cryptocurrency markets delivery dates may differ significantly due to technical limitations and throughputs of networks and additional rules may be applied to spot deals. Make sure to check the full list of rules utilized by the crypto exchange you are using.
Crypto spot trading is faster and slightly riskier (due to higher volatility) compared to spot trading commodities or stocks. However, the speed of transactions on modern online platforms allows for a new mechanic when traders purchase and sell tokens on different exchanges at the same time to pocket the difference between prices on different platforms.
What does spot mean in trading crypto?
While bitcoin (BTC) has some issues related to the speed of the network, Ethereum and some other crypto projects managed to significantly improve transaction speeds allowing for instantaneous delivery of assets. It means that a well-equipped trader can purchase an asset on one platform while selling it immediately on another and if there is a difference in price, it will turn into pure profit.
You must find the best platforms for your financial endeavours if you plan to enter the spot market meaning that analyzing the market and the range of companies offering their services is crucial.
Currently, the global cryptocurrency market is valued at $1.7 trillion with an expected 26% growth within the next 5 years. Over 200 different crypto exchanges offer their services to over 200 million registered day traders.
With so many options to choose from, making an informed decision is quite hard. Nevertheless, some basic features of a reliable trading platform that a spot trader will find exceptional are:
- P2P market with direct deliveries of assets and payments;
- Good interface to interact with spot listings (use a demo to check it out);
- Multiple banking options and integration with commonly used wallets;
- Sufficient variety of tradeable crypto assets;
- A good arbitrage system and customer support.
Liquidity and number of clients are also significant concerns, particularly to someone interested in spot trading meaning that “more users” equals “more available trades and buyers”.
Main spot trading strategies
What is a spot market strategy? It is a complex of decisions and rules that one follows to increase the profitability of trading. Two most popular and widely employed strategies evolve around two simple yet distinct different approaches to investing in general:
- Long-term investors look for cheap assets to purchase and hold for a long time seeking profit in selling the asset at a later date when it reaches a higher price;
- Short-term investors search for differences in prices across the whole market and try to earn on speculative deals.
Both strategies are valid and can be extremely profitable if an investor knows what they are doing. What is spot buying? It is a method of purchasing an asset in a free market where traders are competing against each other. In such an environment rules of fundamental analysis apply like nowhere else allowing experienced, educated traders to pull ahead of the competition.
If you aspire to be someone who earns money on a spot market, you should be more than well-informed about several key topics:
- Techniques of fundamental analysis and understanding of how prices form under rules of supply and demand;
- Technology and investments behind crypto assets that you are planning to trade more often than any other asset;
- Fluent use of modern interfaces for crypto assets (wallets, exchanges, apps related to managing digital assets).
Having experienced-fueled know-how of internet banking and online payment systems is also a huge advantage for a modern trader. While many believe that they had enough interactions with payment systems, many nuances exist that make online spot trading either more profitable or provide advantages to opportunistic people.
For example, some companies offer real cash bonuses to clients who made deposits on the platform using specific payment methods. Some exchanges partner up with banks to offer cash backs and discounts. There are also copy trading crypto platforms, that allow users to follow the trades of experienced traders automatically.
Should you try spot trading?
Crypto spot trading can be incredibly profitable for speculators and long-term investors alike. However, unprepared, ill-informed first-timers will find it very difficult to earn money or make advantageous purchases.
Here is a shortlist of questions you should ask yourself before using any spot trades:
- Do you know at least 2 — 3 crypto exchanges with a spot market?
- Are you familiar with fundamental analysis techniques and most crypto assets traded?
- Do you have a disposable sum of money that you can comfortably risk?
- Do you have experience purchasing, managing, and selling cryptocurrencies?
If you answered “yes” to all of the questions, maybe you should consider trying spot trading as a hobby. Start small and slowly grow confidence and experience to make bigger purchases and integrate more complex strategies and instruments into your trading routines.