The growth over the years in the crypto industry has been nothing short but tremendous. The likes of Bitcoin and Ethereum pioneering this rapid development in the space. Many individuals and companies leverage this growth to solve problems that have plagued the financial world, such as ease of buying and selling crypto assets.
This spot trading guide focuses on helping you understand all you need to know to perform trades on the crypto exchanges.
Spot Trading In Crypto
Spot trading is the buying and selling of financial instruments or assets such as cryptocurrencies by crypto traders. Spot traders make money by taking advantage of the price movement of BNB, ETH, and BTC.
Spot traders use fiat currencies such as BUSD and USDT to purchase crypto assets and resell these assets when the prices have gone up over-the-counter or OTC.
Peer-to-Peer is not just the only method for traders to buy cryptocurrencies. A spot market is also a good place for purchases where the current market price or spot price of an asset continuously updates in real-time as orders get filled. An exchange serves as the intermediary between two traders for ease of transactions. After every transaction, the exchange collects a small transaction fee.
The best spot price for a trader to purchase is found in the market orders, and this purchase is almost immediate. The market order is made up of a list of the best prices available in the market at that particular point in time. The list of prices is also known as the order book.
For example, if you want to purchase BTC when the price is increasing rapidly, your best option is to use the market order, which will allow you to buy or sell in no time.
Spot trading gives traders various options to make money, from investing in these crypto assets, carrying out OTC transactions, and to the very first act of trading, Hodling a crypto asset.
For example, Ian decides to get involved in spot trading and purchase a pair of crypto assets like BTC/USDT, where Bitcoin (BTC) and Tether (USDT) for $20,000/BTC.
After a day, the price increases to $22500/BTC; Ian would have made a profit of $2,500
Over-the-counter or OTC trading is a framework that allows buyers and sellers in the financial market to trade cryptocurrencies directly off exchanges.
OTC trading is known for its uniqueness; buyers and sellers always look for individuals to trade with at the best possible prices as no order book is used in this form of trading. Communication lines are made open through phones and instant messaging for negotiation, fast release of assets, and payment for assets purchased.
It is also important to note that OTC trading can be done in pairs such as crypto-to-crypto, crypto-to-fiat, and fiat-to-fiat with other traders willing to trade with you.
Exchanges VS Over-The-Counter
A crypto exchange is a platform that facilitates buying and selling of cryptocurrencies and other assets through a regulated pricing system. Trading activities on the exchange must be guided by the rules and carefully supervised by the exchange.
Over-the-counter trading, also known as OTC trading, is off-exchange trading where buyers and sellers negotiate crypto assets directly through a communication channel for ease of transaction at the best possible prices.
Peer-to-peer trading, also known as P2P trading, is the buying and selling of cryptocurrencies directly with market participants with zero to no involvement of third-party exchange or intermediaries.
P2P trading gives traders more control over their crypto assets regarding buying, selling, negotiating price, and settlement time.
P2P trading can be profitable and rewarding as traders negotiate prices and take advantage of zero-fee charges. Still, some drawbacks exist, such as fraud and low liquidity.
Centralized Exchanges (CEXs)
Centralized exchanges, also known as CEXs, help facilitate buying and selling cryptocurrencies through an order book. An order book comprises all believe and sell orders, and volumes, with different prices from individual crypto traders. These orders for buyers and sellers are filled and executed based on specific prices with the help of special software deployed on the exchange.
Centralized exchanges are a third party between the buyers and sellers. All information regarding the traders and transactions are stored as data.
Decentralized Exchanges (DEXs)
The decentralized exchange, also called DEX, is a peer-to-peer marketplace where crypto traders carry out transactions of crypto assets without a third-party exchange. High-level programming codes facilitate the transactions on DEXs called smart contracts that execute the orders placed when conditions are met.
DEXs are designed differently based on their benefits, features, scalability, and decentralization. The most common type of DEXs is the order book and the automated market maker (AMM).
DEX trading gives users complete control over their assets. Still, it is essential to note that smart contracts can be compromised, leading to loss of funds for users and requiring good crypto knowledge to carry out trades and operate a wallet.
How Do Spot Traders Make Money?
One of the common ways that traders make money in the crypto industry is through spot trading. Traders speculate on the rise and fall of cryptocurrencies and then place buy or sell orders for the crypto assets they wish to hold over a considerable period. Purchases of crypto assets are in pairs such as BTC/USDT, and traders use the spread on the order book to determine the best price for an asset. In a liquid market, buy and sell orders get filled in no time as they enter the marketplace.
When the price of their assets correlates with their speculation, traders make money by selling off those assets. You do not lose money in spot trading unless you have sold below your entry point in the spot market.
What Is Spread?
A market spread is a price difference between the highest bid price and the lowest asking price on the order book. This can best be understood as the price a seller is willing to let go of a crypto asset and the price a buyer is ready to purchase.
For example, if a seller is willing to sell 1 Bitcoin for $7,000 because of its worth and a buyer is willing to buy 1 Bitcoin for $5,000, the $2,000 difference in price is the spread.
Advantages And Disadvantages Of Spot Markets
Spot trading is one of the most common strategies investors and traders employ for trading the crypto market because of its simplicity. Spot trading, like other strategies, has its weaknesses and strengths. Knowing this gives us an advantage in risk management.
- A spot market is easy to execute and offers a transparent environment where transactions and exchanges of crypto assets are public between the parties involved.
- Because of the ease in the spot market, it is easy to calculate the risk-to-reward ratio; traders can also find the best possible price deals if they are unsatisfied with the current prices.
- Trades between buyer and seller are made on the spot, and orders are filled immediately.
- There are no limitations to the capital for trading, and transactional operations or contracts compare to other forms of trading.
- Spot trading does not provide huge gains as you see in other forms of trading like futures trading. The profit return in futures trading outweighs that of spot trading.
- Spot trading is not suitable for hedging against production or consumer goods in the future as compared to futures or derivative trading. Eliminating the financial risk attached to spot trading is very difficult.
- In a highly volatile market, traders will become victims of price fluctuations before the prices of crypto assets reach their worth.
What Is The Difference Between Spot Trading And Crypto Derivatives?
Spot trading, as discussed extensively, allows traders to buy and sell crypto assets while profiting when those assets go up based on their speculation. It means one can only make a profit if a crypto asset appreciates or continues in an uptrend. If there is downward movement, a trader must wait for reversal or sell crypto assets at a loss.
Derivative trading is the reverse of spot trading; this form of trading allows traders to trade an asset in both directions and make a profit either up or downward. Buyers and sellers go into contracts to sell an underlying asset.
There are three common crypto derivatives, futures, options, and perpetual contracts.
Futures trading involves an agreement between the buyer and seller to buy and sell an asset in the future with the date and amount that have been agreed, although contract details might change. Contracts are usually settled in fiat or the desired currencies by both parties.
Another form of derivative trading involves a contract between buyers and sellers of crypto assets at a particular price in the future. A buyer in options trading can decide whether to buy or not. There are many types of options trading, but the most common are; call and push options and American and European options.
A perpetual contract, popularly known as perpetual future, is the most productive among crypto traders of all the derivatives mentioned. Contracts are kept without a time limit, but you will be charged for servicing the open contract with a funding rate.
With leverage, traders can go long or short with their margin and would make more profit compared to spot trading.
Because of optimized price discovery associated with perpetual futures, most traders prefer to trade using this strategy because it gives them more opportunities and the ability to mitigate risk.
Some of the key features of perpetual futures include;
- Better risk management
- Higher leverage
- Higher liquidity
- Traders can hedge funds
Spot Trading Versus Crypto Derivatives: Which Is Better?
Spot trading primarily consists of buying and holding assets and moving into cash or another fiat currency when the market turns bearish. Earning is only possible during a bullish trend. Spot traders often get stuck holding during downtrends if they couldn’t cash out before the trend reversed.
With derivatives trading, traders get the complete flexibility of trading in both directions of the market and profiting during both uptrends and downtrends. With the help of powerful tools like leverage, derivatives trading can also further amplify return on investment. Leverage also increases risk – however, derivatives trading platforms are known for offering stop loss protection, built-in technical analysis tools, and more to assist with proper risk management procedures.
Derivatives trading can also condense risk by exposing less capital at any time. Spot traders also frequently hedge their spot positions with shorts in the derivatives market. The ability to go short helps to hedge against losses associated with spot positions losing value in a downtrend. As the spot assets depreciate, the short position earns enough profits to offset the losing spot trade.
Only with derivatives do traders get full mastery over markets, their positions, and their portfolios.
How To Start Trading With Margex
Margex is a derivative platform that allows crypto traders to trade with up to 100x leverage with different crypto assets.
Margex is designed in a unique way such that the UI makes trading simple for even beginners, and some of the features include
- No hidden commission
- You can deposit with as low as $10 and trade with a $1 limit on leverage!
- The UI makes it easy for quick deposit and withdrawal
- Leverage can be adjusted when you are already in a position
- Collateral deposit includes BTC, USDT erc20, USDT trc20, ETH, USDC, DAI, USDP, Tron, WBTC. This also allows you to trade any trading pair using any collateral, no need to swap coins.
- Technical analysis tools and charts available for real-time trading
- A referral program of up to 40% commission flat rate!
To start trading on Margex you need to create new users and accounts and verify your email to gain access to Margex UI page where you can enjoy trading, while for existing users you just need to log in. You can access Margex here
On successful login to your dashboard, you will see an interface that looks like this.
- Wallet - All funds can be found here upon deposit, and withdrawal actions are carried out in this section of the interface. You just need to click to access both deposit and withdrawal.
How to deposit on Margex - Click on the wallet and you will be taken to the page for deposit. Click on the deposit button to deposit your funds to be traded with.
You can deposit by sending a crypto asset from another platform using your wallet address or you can buy your preferred crypto asset using your debit card and your crypto will be deposited.
How to withdraw on Margex - This is pretty straightforward, click on the wallet and you will be taken to an interface where you will find the withdrawal button. Click withdraw, select your preferred crypto asset and input the wallet address you want to use. Your wallet address should match the network provider to avoid loss of funds. Your assets will be sent to that address in no time.
Alternatively, you can scroll down where you can deposit or withdraw an asset without much stress!
- Trade - Up on a successful deposit you can head over to the trade section to access the crypto asset you wish to trade with. Margex supports limit, market, and stop market orders.
- To buy an asset at the best possible price, a market order will help you get into position even in a highly volatile market. Limit allows you to set a price range and when your order gets filled, you will have an open position. For a limit position, you need to select a price from the order book at the top right-hand side of the dashboard. Margex does not have liquidity issues and you should expect your orders to be filled almost immediately.
- You can input asset values manually in USD or drag the slider in percentages for the amount of assets you wish to trade.
- Leverage is a borrowed capital used by a crypto trader to amplify a position concerning buying and selling of crypto assets. You can use the slider to select your preferred leverage depending if you are going with cross leverage or Isolated leverage for your asset. After making sure that you are ready to trade you can click on buy or sell.
You will receive a confirmation to proceed with your trading either for a buy or sell position.
Your positions would be filled when you confirm a buy or sell position. The order(s) appears below the chart in an open position, in case the order is yet to be filled it will appear under active orders. You do not need to worry as Margex is designed to take both buy and sell orders. You can set stop loss, take profit and even adjust your leverage size if you feel uncomfortable.
You can click on margin to adjust your leverage, TP to set your take profit, SL to set your stop loss, and close to exit a position when you are comfortable with your profit.
Clicking TP or SL you will receive a prompt to set all parameters and you can confirm when you are done setting that up.
Do not worry; Margex has you at heart in case of the language barrier. You can access other features under settings and change the language settings to something more preferable and easy to understand.
There are many misconceptions regarding spot trading, derivatives, and futures trading, and people wonder how to make money from spot trading.
This part of the article focuses on those questions you wish to have answers to.
How do you buy crypto with spot trading?
Spot trading is one of the most straightforward strategies to make money in the crypto space. It requires you to buy low and sell high.
All you need to do is research the crypto asset you want to hold or hodl for a period that suits your personality. When your investments increase in value, you sell.
You can carry out this repeatedly to grow your income without much stress.
How do I start spot trading?
Assuming you have an account with an exchange, ensure you have completed your know your customer (KYC); this will allow you to deposit and withdraw your funds.
Go to the spot market, search for your preferred crypto asset you wish to buy, and you can purchase the order book.
Should you spot trade crypto?
Spot trading is quite popular among crypto traders as it is simple to navigate, and you only need to buy and hold your crypto assets and then sell them when it appreciates in worth.
How do you make money on spot trading?
To make money in spot trading, you need to speculate on the asset you wish to invest in, buy the crypto asset and wait for it to increase in worth before selling the asset. Note that you do not lose money in spot trading unless you wish to sell at a loss.
What is the difference between spot and derivative Trading?
Spot trading is the simplest form of trading crypto assets that involves holding or hodling until it appreciates and you sell to make money. It gives the trader more ownership of assets purchased.
Derivative Trading is a bit different than spot trading as you do not need to own the crypto asset you trade based on contracts for the underlying assets. The value of the contract is designed for the trader to follow the asset's price. As the value of the assets rises and drops, so is the value of the contract.
Derivatives are more lucrative; this allows the trader to trade in both ways, either long or short, depending on the market's direction.
What is the difference between spot and futures trading?
You can buy and sell cryptocurrencies and fully own such assets in the spot market.
The futures market deals with futures contracts to buy/sell at a later date without owning the underlying asset. Futures trading is more flexible because traders can buy/sell depending on the market's direction. It is also deep regarding liquidity with the opportunity to trade as high as 100x in leverage.