Crypto

Trading

A spot market is referred to assets like forex, crypto, or commodities traded on the spot whenever the buying/selling order is filled. Learn how crypto spot works today!

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With an increasing number of institutions beginning to invest in cryptocurrency, it’s inevitable that more users have started to take an interest in it. To begin a journey in cryptocurrency investing/trading, one would typically wish to start with the basics, understanding how to buy and sell cryptocurrencies before moving on to trading.

Spot trading is the most basic and simplest method for trading cryptocurrency. New traders usually start their cryptocurrency trading journey by interacting with spot markets. Compared to investing in crypto, which typically means holding a cryptocurrency for a prolonged period of time, spot trading involves buying and selling a range of cryptocurrencies in an attempt to generate regular short-term profits.

In this article, we’ll explore spot trading.

Spot trading refers to buying and selling cryptocurrencies at the current market price, also known as the spot price, with the intention of immediate delivery of the cryptocurrency traded. “Delivery” in this context refers to the buyer and seller fulfilling their commitment to the transaction, with the buyer offering the payment and the seller offering the cryptocurrency traded.

Spot traders typically buy cryptocurrencies at the current market price with existing capital, hold onto the cryptocurrency for a period of time in hopes of the price increasing so they can eventually sell their crypto to realize a profit. Spot trading is popular among traders, given that they can open short-term positions with low spreads and no expiration date.

 the cryptocurrency spot market. This involves selling a cryptocurrency and repurchasing it when the price decreases.

Taking ownership of the actual cryptocurrencies that are being bought and sold differs from trading derivatives, such as a cryptocurrency contract for difference (CFD), in which the asset traded only tracks the price of the cryptocurrency and doesn’t confer ownership of the cryptocurrency upon traders.

A spot price refers to the present market rate for immediate purchase or sale of a particular asset.

Trading pairs describe assets that can be exchanged for one another. There are two main types of trading pairs in the cryptocurrency spot market: crypto-to fiat pairs (e.g., ETH/USD) and crypto-to-crypto pairs (e.g., ETH/USDT).

 gives traders information regarding the depth of a given market. It displays a real-time list of open buy and sell orders for a selected cryptocurrency. There are two sides to the order book:

An open order refers to unfilled orders that have yet to be executed.

There are different kinds of orders that can be made in a cryptocurrency spot market.

This allows spot traders to prepare spot trades in advance. Users can set the desired price at which they wish to buy or sell the cryptocurrency, known as the limit price. Once the market price reaches that price, the trader’s order will be executed, made possible through conditional agreements that have been specified by the trader.

A market order is executed immediately at current market prices. This order type is used by traders when they wish to complete their trade orders as quickly as possible. Spot traders can make this order easily, without having to enter a price. Once a market order has been executed, a trader can purchase or sell their holdings immediately at the best available spot price.

There is no guarantee that the market price won’t change while the order is being executed, especially given the volatile market conditions of cryptocurrency.

Traders can refer to the transaction history to keep track of the type of orders they’ve made.

Most exchanges charge a transaction fee for each spot trade order. The amount of fees to be paid depends on 

Takers are traders who remove liquidity from the order book. A buyer who inputs a market order is considered to be a taker. A trader whose order is matched immediately with an existing buy or sell offer subjects them to a taker fee.

A maker is a trader who provides liquidity to the market by increasing the market depth of the order book. A maker fee is applied when a trade order is placed in advance with limit orders.

However, not all limit orders are charged a maker fee. For example, when a trader is matched with an order straightaway, they might be charged a taker fee instead. To ensure that a maker fee is charged, traders can place a limit order so they won’t be matched with an order immediately even when the terms are met.

Differences Between Spot Trading & Margin Trading

In spot trading, traders purchase cryptocurrencies with the capital they have available, fully possessing the asset once the trade has been executed. 

, traders borrow capital from a third party to complete the purchase of cryptocurrencies. This allows margin traders to purchase larger quantities of cryptocurrencies or enter larger trading positions, resulting in the potential for more significant profits. However, this is considered riskier as a losing margin trade could potentially amplify the losses and cost margin traders more than their initial capital.

In addition, margin traders are required to consistently meet their margin requirements to avoid receiving a margin call, which could cause the trader’s assets to be sold off. Margin traders are thus required to constantly keep an eye on their trades. In addition, the costs of a margin loan can pile up, rendering the need for margin traders to trade in shorter time frames more often as compared to spot trading.

Differences Between Spot Trading & Futures Trading

With spot trading, cryptocurrencies are purchased with immediate delivery and spot traders will own the underlying asset. Afterward, spot traders generally wait for the price of the cryptocurrency to increase before taking profit.

, on the other hand, don’t own the underlying asset; they merely own a contract which represents the cryptocurrency’s value. In futures trading, both the buyer and seller agree to trade a certain quantity of cryptocurrency at a specific price in the future, which is then locked in the contract until the transaction is completed at a later date. When the contract matures on the predetermined date, the buyer and seller come to a settlement.

The main difference between spot trading and futures trading lies in the use of leverage. Futures trading allows for the use of leverage, so that futures traders can enter a larger position even if they have a lower account balance.

Spot markets, also known as cash markets since traders make payments up-front, are available for a wide range of asset classes. These include stocks, bonds and the foreign exchange (forex) market. NASDAQ and NYSE (New York Stock Exchange) are two of the most popular spot markets.

To understand how the spot market works for cryptocurrency spot trading, let’s take a look at a BTC/USDT spot trading pair.

Buyer A, with 1,000 USDT, puts in a buy order for an equivalent amount of BTC at the unit price of $42,000. Buyer A will be matched with Seller B, who offers BTC in exchange for USDT at Buyer A’s desired price. Once Buyer A and Seller B have agreed on the price, the order will be executed and filled immediately.

Spot markets are commonly affected by market sentiment, and spot prices for nearly all cryptocurrencies fluctuate wildly. Therefore, understanding 

There are different types of spot markets for cryptocurrencies, which we’ll discuss in the next section.

Spot trading occurs in two major types of spot market: Exchanges and over-the-counter (OTC) trading.

Exchanges are platforms where market demand and supply are aggregated, allowing spot traders to buy or sell cryptocurrencies quickly at market price. In cryptocurrency spot markets, there are two distinct exchanges: centralized exchanges (CEXs) and decentralized exchanges (DEXs).

 acts as an intermediary between spot traders and cryptocurrencies, functioning as a custodian and managing the traded cryptocurrencies. CEXs provide an order book, which will provide spot traders information with regard to the amount of cryptocurrency available for sale, and also the market demand for a cryptocurrency. This is useful for gauging the market liquidity available for trading.

CEXs grant spot traders access to fiat-crypto trading pairs. To begin spot trading, users simply have to deposit either fiat or crypto into their account.

There are certain responsibilities specific to CEXs:

Since CEXs offer the above functionalities and services for users, spot trading on CEXs often involves transaction fees. Fees are also charged for listing and other trading activities. Thus, CEXs can profit regardless of the market state as long as they have sufficient trading volume and users.

This type of exchange is most commonly used for cryptocurrency trading. 

 have similar functionalities and services as CEXs. However, the greatest difference lies in that there are no intermediaries involved in DEXs. The matching of buyers and sellers is achieved through blockchain technology, where smart contracts with predetermined rules are used to execute trades directly from a trader’s wallet. With self-executing codes, traders are able to transact without needing to trust an intermediary to complete the trade for them. Similarly, the traded cryptocurrency doesn’t need to be held in custody by the CEX, giving traders full ownership of the cryptocurrency.

When using DEXs, traders aren’t required to create an account, and can bypass the KYC process. This provides users with a lot more privacy and freedom, allowing them to trade directly with others. However, the tradeoff is that should there be any technical issues, the lack of KYC and customer support leave the trader largely stranded.

Some DEXs use an order book model, similar to that of CEXs. A more recent development within the space is the automated market maker (AMM) model, such as that of Uniswap and PancakeSwap. AMMs use a formula to determine prices and make use of 

Spot trading can be carried out through OTC trading or P2P trading, with each carrying its own benefits.

OTC trading is considered to be off-exchange, as the buyer and seller transact directly, without any third party or trading platform overseeing their trade. The buyer and seller aren’t using an order book, and instead can choose to transact any cryptocurrency at any price that they both deem fit, even if it's below or above market price.

OTC trading is popular among spot traders for the following benefits:

, particularly for cryptocurrencies with lower liquidity such as small-cap cryptocurrencies. This results in spot traders being unable to fill their order at the price desired. OTC trading bypasses the order book, letting spot traders fill their trade positions without experiencing high slippage.

Since OTC traders are transacting off-the-market, they can trade a large amount without worrying about causing volatility that would result from trading in an open market.

Spot trading allows users to hold tokens for up to multiple years. It’s thus used by many traders to dollar-cost average (DCA) their favorite cryptocurrencies. Note that profits only become “real” when cryptocurrencies are “moved,” meaning converted to fiat currency or stablecoins. It’s also at this point that cryptocurrencies become taxable, but they can be held indefinitely before they’re taxed.

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.

What Is a Spot Market for Crypto Trading?

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