With more institutions starting to invest in cryptocurrencies, it’s inevitable that it may spark your interest in crypto investment. Before dabbling in crypto trading, you would typically want to get your hands on crypto to buy and sell, eventually trading your assets.
A spot market is unique, as you can trade without margin or leverage. For example, spot markets occur when sellers and buyers come together to engage in cryptocurrency exchanges. The main difference between spot markets and other types of trading is that settlement occurs almost instantaneously, which means that the trade is often completed immediately after placing a bid and ask offer.
Spot trading occurs on both centralized (CEX) and decentralized (DEX) exchanges. The difference is that with a CEX, a third party monitors the transaction before securing all of the assets involved in the trade on behalf of the seller and buyer. As for decentralized spot trading, any exchanges that are made occur without a third party. Instead, the transactions are stored on a public ledger, which makes the transaction transparent. You can use either of these options to purchase, sell and hold assets in your wallet. The following sections offer a comprehensive guide to spot trading crypto.
What Is a Spot Market?
A spot market is a type of financial market where assets are traded immediately. The three components of a spot market include a seller, buyer and order book. Whenever a buying/selling order is filled, the transactions are settled on the spot.
Spot markets are available for a wide range of trading assets, including stocks, bonds, cryptocurrencies and the foreign exchange (forex) market. Just as with crypto markets, forex markets involve the trading of currencies.
Despite the resemblance of these two spot markets, there are a few key differences. For one, forex is the largest and most liquid financial market valued at $2.4 quadrillion. Forex trading involves brokers, middlemen and institutions that collect fees at different intervals throughout the trading process. On the other hand, when you engage in crypto spot trading, there are usually no middlemen when you’re trading with a direct peer-to-peer crypto transaction on a Decentralise Exchange (DEX) is a crypto exchange platform that is built upon blockchain technology and negates the need ....
As touched on previously, cryptocurrency spot markets allow people to trade assets with other individuals in real-time, which means that the transactions are settled on the spot once the buyer and seller’s order is filled. Spot markets are available as both over-the-counter and via third-party exchanges. A notable difference is over-the-counter trades do not rely upon intermediaries to monitor the transaction between buyers and sellers, and third-party trades do.
A successful spot trading must include a buyer, a seller and an order book. To understand how the spot market works for crypto trading, let’s take a look at a spot trading pair of BTC/USDT.
For example, buyer A with 1,000 USDT puts in a buy order with a maximum amount to get an equivalent of BTC at the price of $42,000. Buyer A will then be matched with seller B who offers BTC in exchange for USDT at the aforementioned desired price. Once Buyer A and Seller B agreed on the buying and selling price, the order will be executed and filled immediately. In return, buyer A will get 0.0238 BTC while Seller B gets 1,000 USDT.
Spot markets are commonly affected by market sentiment. The spot prices for nearly all cryptocurrencies fluctuate wildly, depending on the overall consensus from investors about how those cryptocurrencies should be performing. Being able to understand market sentiment can help you when engaging in crypto spot trading.
Understanding Crypto Spot Trading
It’s important to understand that spot trading involves someone purchasing an asset at a current price, after which the individual holds the asset in the hopes that it will increase in value. While this is the basic concept of spot trading, the process is actually more involved than this.
Let’s say that a trader wants to purchase Bitcoin (BTC) but with Tether (USDT) instead of USD. The USDT is a stablecoin that gained popularity because it is pegged to USD. That means, 1 USDT could be worth as close to $1 depending on the market price.
When you look at the BTC/USDT spot trading pair Bybit spot market, the spot price of these changes in real-time and users can review the fluctuations for the last 24 hours. You can use this market to either exchange USDT for BTC, or BTC for USDT. Keep in mind that with spot trading, it’s only possible to trade assets that you already own. Leveraging is possible only with margin and futures trading.
A few key components you need to consider when spot trading are as follows:
- Market order: When you take liquidity away from the order book at the best price available to you immediately.
- Limit order: It is a buy order added to the order book when sellers agree to sell the assets at the agreed price to a buyer.
- Conditional order: A conditional market order is filled on the spot when the trigger price met the last traded price. Once the order book receives the conditional limit order, it’ll be executed.
- Order history: You can easily refer to your transaction history and the type of orders you’ve made to keep track of the executed order records including the filled and canceled orders.
If you complete a market order, you should be notified immediately that the order has gone through based on the real-time executions. If your entire order isn’t filled immediately, the portion that remains unfilled will be canceled. While the execution for a limit order is not guaranteed as it is highly dependent on the seller that agrees to your buying price.
Before completing a buy or sell order, keep in mind most exchanges charge a transaction fee for each order. These fees depend on whether you’re a maker or taker.
To easily understand what is a maker or taker, here are the key elements:
- Makers: Provide liquidity by increasing the market depth of the order book.
- Takers: Remove liquidity from the order book. If you put in a market order as a buyer, you’re considered a taker.
Different exchange platforms have different fees. When using Bybit, takers must pay a fee of 0.0075% of the transaction. On the other hand, makers earn a rebate that’s worth 0.0025% of the transaction.
Remember also that the spot price is different from the futures price. The spot price for a cryptocurrency is the current cost of the currency for immediate delivery. On the other hand, the futures price is an agreed-upon price for a cryptocurrency that will be delivered to you at some point in the future. Futures orders are usually delivered after a few months. In many cases, the futures price is usually higher than the spot price.
Spot Trading vs. Futures Trading: The Main Differences
Crypto spot trading and futures trading have some clear differences to be aware of before you start trading. As mentioned previously, the prices of an asset is usually different. When you engage in spot trading, the transaction occurs immediately. Futures trading differs because both parties must agree on a price, which will be locked in a contract until the transaction is completed at a later date. When the contract matures on the pre-determined date, the buyer and seller come to a settlement.
Fluctuations in spot prices occur based on the asset’s volatility and the market sentiment in real-time. Because both parties must agree on a price when trading futures contracts, the speculated pricing is based on several different factors and isn’t always determined by the asset’s volatility. The date of delivery also differs substantially between the two options. While futures transactions can be completed months after the purchase, spot trading generally occurs immediately. Some additional differences include:
- Margin and leverage: Futures contracts allow traders to enter a larger position at a lower account balance in the hope of higher profit returns.
- Trading fees: The fees are different from one exchange to another.
- Settlement mechanism: Spot settlement is immediately once the order is filled while futures contract has expiration date and usually all trading is halted until the contracts are settled in physical or cash settlement.
- Parties involved in the transaction: Spot trading involves only buyers and sellers. An intermediary may be involved in futures contracts.
- Hedging and risk management: Futures contracts can be used to mitigate risks like price fluctuations.
Where to Trade the Crypto Spot Market
When you want to begin crypto spot trading, it’s essential that you focus on where the trade will occur. Spot trades can occur via over-the-counter trading or peer-to-peer trading. It’s also possible for these transactions to take place via centralized exchanges or decentralized exchanges. Let’s take a look at it:
Over-the-Counter Trading or Peer-to-Peer
Spot trading can be done over-the-counter (OTC) or peer-to-peer (P2P), both of which have their advantages. Over-the-counter trading is considered to be off-exchange. When this type of trade occurs, it takes place between the two parties directly — a market maker or broker/dealer to facilitate the transaction with a buyer until the successful completion of the transaction. Unlike trading spots on crypto exchanges, OTC trading often struggles to fill your orders as there may be insufficient demands from buyers and there aren’t any displayed order books as well.
P2P exchanges help facilitates the buying and selling of crypto through a barter system. The buyer enters a P2P platform to input all of their trade preferences, after which they can filter the criteria to exchange their assets accordingly. Every offer is unique in regard to price, offer limits, and payment methods, which means that the buyer must choose an offer based on their preferences. When the buyer accepts an offer, the transaction is processed. In general, OTC trades allow for larger transactions and more anonymity than P2P trades.
Centralized Exchanges (CEXs)
Centralized exchanges involve an intermediary between traders. The exchange usually acts as a custodian for the traded assets. Every core centralized exchange allows traders to have access to fiat trading pairs, which means that you can begin trading by simply placing crypto or fiat into your account. Centralized exchanges are required to ensure security, customer protection, and anti-money laundering (AML) and know your customer (KYC) functionalities. In return for the provided services, trading on centralized exchanges usually involves transaction fees whether it is during a bull or bear market. As CEXs profit from the trading volume and the total performed trade.
Decentralized Exchanges (DEXs)
A DEX shares similar services as a CEX, however, it matches buyers and sellers without the use of an intermediary. The purpose of a decentralized exchange is to make sure that traders don’t need to trust an intermediary to complete a transaction (hence the term, “trustless”).
DEX boasts of the use of blockchain technology where trades can occur directly from a trader’s wallet through pre-determined rules on smart contracts. The self-executing nature of smart contracts allows trades to be executed through a customed rules and anonymously. Once a decentralized transaction takes place, the funds are sent into your account instead of being put in the custody of a centralized entity.
How to Trade the Spot Market with Bybit
If you’re interested in trading the spot market with Bybit, the following is a step-by-step guide to help you get through the process.
- Create an account on Bybit. Register on Bybit web or Bybit App and do the KYC verifications to unlock a higher trading volume, higher deposit and withdrawal limits.
- Buy BTC or USDT with your preferred fiat currency on Bybit Fiat Gateway to access the spot trading pairs.
- Once your account is funded, hover over the spot market hub to trade spot pairs by selecting your limit, market, and conditional orders.
- The spot market chart is prepared with customizable historical data of an asset with standard and advanced displays. There are different technical indicators incorporated into the chart for you to analyze the asset.
- The order book provides the utmost transparency to be alerted with the buy and sell orders. So that you can adjust your bid/ask price.
Keep in mind, however, that only market and limit orders and then only conditional market orders will be filled immediately at the best available spot price. Once you’ve inputted the necessary buy or sell information, all you need to do is press the “Buy BTC” or your preferred digital assets button to execute the trade.
Before you get started, be aware that trading limits are imposed by Bybit for spot trading. For instance, market orders can only be filled at the top 10 bid/ask order prices in the order book to prevent market manipulation. In the event that a portion of your order exceeds this limit, it will be declined.
If you already have derivatives account on Bybit, but want to deposit funds into your Bybit spot account, here’s what you need to do:
Bybit Web: You can click “Deposit” or “Transfers” in the spot order zone to enter a page where you can transfer your account balance from “Derivatives” or “ByFi account” to the Spot account.
Bybit App: Click “Asset” at the right-hand corner on the mobile display, then select “Spot” account to deposit based on your preferred currency. Otherwise, click “Transfer” to transfer your balance from “Derivatives Account” to “Spot”.
There are 15 spot trading pairs available on Bybit, including BTC/USDT, BIT/USDT, EOS/USDT, XRP/USDT, ETH/USDT, LINK/USDT, DOGE/USDT and more. Every transaction performed in Bybit’s spot market will be charged with 0.1% maker and taker fees.
Calculating Bybit Spot Trading Fees
Let’s take BTC/USDT spot trading pair as an example. BTC is trading at a current price of $42,000. Traders can buy or sell 1 BTC at 42,000 USDT. The formula is as followed:
Trading Fees = Filled Order Quantity x Trading Fee Rate
Alice buys 1 BTC using a Market Order with USDT. The taker’s fee for Alice would be:
1 x 0.1% = 0.001 BTC
Jack buys 42,000 USDT using a Limit Order with BTC. The maker’s fee for Jack would be:
42,000 x 0.1% = 42 USDT
Once the order is filled:
Alice needs to pay a taker fee of 0.001 BTC for the 1 BTC with the created Market Order. After the auto-deduction of trading fees, Alice will receive 0.999 BTC in total.
Jack buys 42,000 USDT with a Limit Order and will pay a maker fee of 42 USDT. He will receive 41,958 USDT in total after the deduction of maker fees.
However, if the orders are canceled or unfulfilled, Jack and Alice would not be charged with any trading fees.
The Advantages of Spot Markets
Trading crypto on the spot market means the spot price is completely transparent and based solely on the market’s supply and demand. In comparison, the futures market typically uses numerous reference prices.
As compared to derivatives, spot trading means you actually own the asset and trading it is relatively simple and straightforward. If you invest $1,000 in a spot market, you can easily calculate what your risk will be based on the current price, as well as your entry point. While margin trading can amplify your profits, it also comes with higher risks that could cause you to lose all your initial investment.
Another notable benefit to spot trading is that you can enter and exit a transaction whenever you want, which isn’t possible with margin trading and derivatives. Spot trading is great for beginners who prefer to just buy and hold without worrying about their assets being liquidated due to volatile price fluctuations.
The Bottom Line
Overall, using the spot market for crypto trading can be a great way to own some cryptocurrencies at the desired price. The immediacy that comes with a spot market trade can be invaluable when you want to obtain instant returns. In comparison, you’ll need to wait for your returns with futures trading, and must contend with the risk that you could lose your initial margin.