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If you are familiar with financial markets, you've likely come across spot trading, often compared to leverage trading. But what exactly sets these two methods apart? More importantly, how can you profit from crypto spot trading while managing its risks? This article will answer these and other key questions, all in one place—so keep reading!
How Does Crypto Spot Trading Work?
Crypto spot trading is the act of buying and selling digital assets at the current market price for immediate delivery. The term "spot" indicates that the transaction between the buyer and seller is settled "on the spot," with no contractual obligations in the future for either side.
Spot traders make profits by buying at prevailing market prices and then selling later at a higher market price, pocketing the difference. The timeframes for spot trading can vary significantly, ranging from minutes (scalping), days (day trading), and weeks (swing trading). The trading strategies that involve holding an asset for a longer time, such as position trading and HODLing, can, in theory, also be considered spot trading strategies, but in practice, these are closer related to the realm of investing, not trading.
The balance of supply and demand from the individual traders in the spot market determines the real-time crypto prices. The pricing dynamic is influenced by many factors, such as market sentiment, geopolitical tailwinds, macroeconomic trends, and black swan events, such as exploits or rug pulls. When demand for a particular cryptocurrency increases, its price goes up, and then it is said that the asset is in a bull market. On the flip side, if demand dwindles, prices normally decrease, indicating that bears have taken hold of the asset.
Pros and Cons of Crypto Spot Trading
Like all trading methods, spot trading has advantages and disadvantages that any trader should consider carefully before diving in. Let's take a closer look!
Pros:
Simplicity: spot trading is one of the most straightforward trading strategies to understand, even for absolute beginners. Unlike margin or futures trading, it doesn't involve any contracts or expiration dates, which means there's freedom to enter and exit positions whenever you feel like it.
Immediate delivery: when you buy crypto on the spot market, you almost instantly take ownership of the asset. This means that you can earn interest on your crypto assets by staking and lending, or you can just keep them in your cold wallet and HODL forever.
Less risky: unlike margin traders, spot traders settle the transaction with their own funds, without borrowing from the broker. This eliminates the risk of liquidation in the event of market volatility.
More liquidity: the biggest cryptos by market cap, such as Bitcoin, Ethereum, BNB, Solana, and XRP, always have high liquidity in the spot market, which means that traders can buy and sell assets without significant price slippage.
More crypto options: if your object of interest is some exotic altcoin that isn't listed on major crypto exchanges, there are virtually no chances for margin and futures trading for this asset. Yet, even the most obscure tokens can be bought on the spot market off the decentralized exchanges such as Uniswap, allowing traders to seize market opportunities for a promising new asset before the broad market catches up.
Cons:
Modest gains: without leverage, spot market traders can only use funds they already own, so the profit potential is also limited.
No short selling: all spot trading strategies involve buying low and selling high, which means that traders bet on prices going up in the future. If you believe that the price of the asset is going down and would like to capitalize on it, you would need to employ more complex strategies like margin trading and futures contracts.
Security risks: since spot trading means that you take ownership of an asset, you also have to assume all risks involved with crypto custody, which can be a concern given that hackers keep coming up with new ways to launch attacks on crypto users.
Transaction fees: if you are a frequent trader, especially a day trader or even scalper, fees charged by the platform can eat a significant chunk of your profits. That being said, make sure you familiarize yourself with the fee structure of your service provider beforehand to avoid getting ripped off.
As you can see, spot trading is arguably the easiest and most transparent way to participate in crypto trading, which makes it attractive for both beginners and experienced traders. The risks named above shouldn't deter you from this trading method, as they can be successfully mitigated by putting more effort into your due diligence and setting up secure custody solutions. And the disadvantages, such as modest gains and lack of short selling are relative to your risk tolerance, so definitely not a big deal for those content with steady, albeit smaller, returns.
Examples of Cryptocurrency Spot Trading
Now that you are familiar with the gist of crypto spot trading and aware of its risks, let's top our knowledge with specific spot trading cases to better illustrate how the whole thing works.
Bitcoin (BTC) spot trading: you believe that the Bitcoin price will go up, so you place a buy order to get an equivalent BTC amount of 1,000 USDT at the current market price of $65,000. You are matched with another trader who offers to sell BTC at the aforementioned price. In two days, Bitcoin's price increased to $70,000, so you sell it at the new price, pocketing a profit of $76.
Ethereum (ETH) swing trading: on May 1, you bought 5 ETH at $3,000 each, betting on the Ethereum exchange-traded funds approval by the SEC. Your intuition didn't fail you: in a surprising move, the agency greenlights the sale of spot Ether ETFs, so the ETH price grows to $3,790 on the news. You sell your 5 ETH at this price, resulting in a profit of $3,950.
Solana (SOL) day trading: after reading our article on crypto chart patterns (check it, really!), you were able to identify a pattern in SOL price movement and decided to take advantage of short-term volatility. At 6 am, you buy 15 SOL at $166, totaling 2,490. You place a take profit order at $173. In two hours, SOL price reaches this level and your order self-executes, earning you a quick profit of $105.
Spot Trading vs Futures Trading vs Margin Trading
Now that you know how spot trading works, let's take a brief look at futures trading and margin trading to see how they differ.
Unlike the spot market, where you settle the transaction at the current market price, trading on the futures market means that you agree to buy or sell cryptocurrencies at a predetermined price on a specific future date. Such an approach allows you to bet on the upward or downward price movement of an asset without actually owning it — when the contract's expiration date arrives, the losing side of a bet simply transfers the difference between the agreed-upon price and the current market price to the winning side. While futures contracts can be a powerful tool for hedging against losses, it also comes with additional risks: since futures trading usually involves leverage, profits and losses can be magnified. Obviously, the barrier to entry is also higher than in the case of spot trading, as it requires a profound understanding of market dynamics and the foundations of futures pricing.
Margin trading is different from spot trading in a way that it involves borrowing funds from the broker to open a larger position than would be possible with your own capital. A certain amount of your money is still required, though: it serves as collateral for the borrowed funds. Margin trading also enables traders to bet on crypto prices going down by selling the asset first and buying it back at a lower price. Again, tapping into margin trading requires more advanced knowledge about the market, such as understanding liquidation risks and how to maintain your margin to avoid forced closure of a position.
Also, don't let the terminology confuse you: margin trading and leverage trading are often used interchangeably. However, a degree of distinction is still present: margin trading is mostly used to refer specifically to the borrowing aspect of a trade, while leverage stands for the ratio of borrowed funds to own funds.
Top Platforms to Trade the Crypto Spot Market
So, are you ready to embark on your spot trading adventure? If the answer is yes, you may find it helpful to have a look at our curated list of the best platforms for crypto spot trading.
To save on your time and article space, we won't go deep into detail about how centralized exchanges differ from their decentralized peers. Just for a quick refresher: centralized exchanges are owned by a legal entity, require KYC checks, match buyers and sellers via the order book model, and enable fiat currency conversion into crypto, whereas decentralized exchanges do not have a central authority, are permissionless, crypto-to-crypto only, and typically use the liquidity pool model to facilitate trades.
At the time of writing, the top centralized exchanges for spot trading are:
Coinbase: widely considered one of the most secure exchanges, Coinbase is a public-traded company, which entails high reporting standards and strict regulatory oversight. The exchange offers its services in over 100 countries, including the United States, and supports multiple fiat currency on-ramps. The USD cash deposits in the account are FDIC-insured for US customers. Besides this, the platform is known for its user-friendly interface and high liquidity.
Binance: despite facing regulatory scrutiny in several countries and a recent settlement with DoJ that prompted the resignation and subsequent guilty plea of founder Changpeng "CZ" Zhao, the exchange keeps going, boasting a higher selection of altcoins than its immediate rival Coinbase. When it comes to the interface, the learning curve may be steep, but the wide selection of advanced trading tools compensates for it. The exchange has a dedicated Binance.US platform for US residents.
Kraken: a reliable and trustworthy platform, Kraken is known for charging some of the lowest fees among its competition. The exchange supports many cryptocurrencies, offering high liquidity and advanced order types. Available in over 190 countries, including the US, although not in all states.
Robinhood: although Robinhood is a stock brokerage rather than a crypto exchange, its platform allows users to trade 18 cryptocurrencies, namely Bitcoin, Ethereum, and some of the top altcoins. Robinhood is available exclusively for US residents.
At the time of writing, the top decentralized exchanges for spot trading are:
Uniswap (v3): the biggest decentralized exchange by TVL (over $3 billion!), Uniswap has long become a household name in DeFi. Besides Ethereum, the DEX is live on multiple other blockchains, such as BNB Smart Chain, Arbitrum, Optimism, Polygon, Base, Avalanche, and Celo. The protocol allows anyone to earn rewards by becoming a liquidity provider and has its governance toke, UNI. No KYC is required: all you need to trade on Uniswap is a self-custodial wallet such as MetaMask or Trust Wallet. And of course, nearly every token that has ever existed can be traded on Uniswap!
PancakeSwap: the leading decentralized exchange on BNB Smart Chain, PancakeSwap is also available on Ethereum and Aptos. The DEX has a liquidity provision token CAKE and offers rewards for liquidity providers, as well as staking and yield farming. As in the case of all DeFi platforms, the only thing you need to start trading on PancakeSwap is a self-custodial wallet.
Curve Finance: a popular decentralized exchange that specializes in stablecoin trading, offering highly efficient swaps between stablecoins with minimal slippage. While the protocol operates primarily on Ethereum, it also supports several other blockchains, including Arbitrum, Avalanche, Harmony, Fantom, and Polygon. A key part of Curve’s ecosystem is the CurveDAO, governed by the holders of the CRV token. As well as being able to swap stablecoins and volatile assets, Curve users can earn rewards from trading fees by supplying liquidity to the protocol
1inch: while not exactly a decentralized exchange but a DeFi price aggregator, 1inch allows traders to search for a trade with the lowest fee across multiple protocols. As well as pointing users to the best crypto prices, 1inch also has its own liquidity pools that you can supply liquidity to and earn rewards in 1INCH, its native token.
Bottom Line
To sum things up, crypto spot trading is an easy way to make your first steps in crypto — just buy low off the CEX or DEX and sell high when you hit your price target. Still, despite it being straightforward to enter, spot trading has its risks and limitations, such as potential security breaches, high transaction fees, lack of leverage, and limited gains. To make the most of this trading method, we advise you to carefully research your asset of choice before buying it, and evaluate your risk tolerance.
