Spot market for cryptocurrencies: basics and trading practices

Spot trading is one of the most fundamental ways to interact with financial markets. The essence of the process is simple: you buy or sell assets and receive them almost immediately. Unlike more complex instruments, spot trading is a direct exchange – you pay cash or its equivalent and receive the asset in hand.

Such deals take place on various platforms: centralized exchanges, decentralized protocols, and over-the-counter channels. For newcomers in the cryptocurrency world, spot trading is often the first step in mastering trading.

Basic Concepts of Spot Trading

What is meant by spot trading?

Spot trading is the buying and selling of assets at the current market price with immediate delivery. When you place a market order to buy Bitcoin (BTC), Ethereum (ETH), or any other cryptocurrency, the transaction is executed at the best available price at the time of placement.

The current market price is called the spot price. It is constantly updated in real-time as buyers and sellers match their orders. Unlike futures contracts, which are settled in the future, spot trading is today's deal with instant delivery.

What is the spot market?

The Spot market is an open space where buyers and sellers exchange assets directly. Fair prices are formed here based on supply and demand. The market operates 24/7 for cryptocurrencies, allowing transactions to be made at any time of the day.

The word “спотовий” comes from the English “spot” – instantly, as assets are transferred at the time of the deal. Previously, this was called the “cash market,” as traders paid in advance.

Architecture of Trading Platforms

Centralized Exchanges

A centralized exchange acts as an intermediary between market participants. It manages trading, holds users' assets, ensures security, and complies with regulatory requirements.

To start trading on a centralized exchange, you need to:

• Register and complete verification (KYC)
• Top up the account with fiat currency or cryptocurrency
• Select a trading pair and place an order

In response, the exchange charges a fee for each transaction. This allows it to generate income regardless of market direction – both during price increases and decreases. The main advantages are reliability, user support, and asset protection.

Decentralized Exchanges (DEX)

DEX offers an alternative to centralized platforms. Here, trading occurs through smart contracts on the blockchain, without intermediaries.

DEX users do not need to create an account. They connect their wallet and trade directly with each other. Smart contracts automatically execute transactions and transfer assets.

Popular DEX models:

• Order Book Model: users place orders just like on traditional exchanges
• Automated Market Maker (AMM): the algorithm determines prices based on the ratio of assets in the liquidity pool. Examples – PancakeSwap, Uniswap

The advantages of DEX are greater privacy and self-management of assets. The disadvantages are the lack of customer support, the absence of KYC ( which can be both an advantage and a disadvantage ).

Over-the-Counter Trading (OTC)

OTC deals are carried out directly between traders without the involvement of a third party. Agreements are often negotiated via phone, messengers, or specialized OTC portals.

OTC is particularly useful for large orders. If you want to purchase a large volume of an asset at once, it can cause price slippage on a centralized exchange. In the OTC market, you agree on a fixed price with the counterparty, avoiding the impact on the market price.

Delivery in OTC often takes 2 working days (T+2), but for cryptocurrencies it can be instantaneous.

Trading Mechanics and Order Types

How Order Execution Works

When you place a market order to buy, the exchange immediately selects the lowest available price from sellers. If the volume at that price is insufficient for your order, it automatically moves to the next price level.

Example: you want to buy 10 ETH. The order book shows 3 ETH for $2000 and 7 ETH for $2005. Your order will be executed: 3 ETH for $2000 + 7 ETH for $2005.

Order Types

• Market Order: executed instantly at the current price. Fast, but the price is not guaranteed.
• Limit Order: you specify the maximum price for buying or the minimum for selling. It is executed only at this price or better, but may not be executed at all.
• Stop-limit: a combination of the two previous ones. The order is activated when the price reaches a certain level.

Spot trading vs. other trading methods

Spot vs. Margin Trading

Spot trading is the use of only your own funds. You buy the asset in full and take delivery of it.

Margin trading allows you to borrow funds from a third party with interest. This enables you to open larger positions with less capital, but it also increases potential losses and the risk of liquidation. If the price moves against you, you may lose more than you invested.

Spot vs. futures trading

In the futures market, you do not buy the actual asset, but rather enter into a contract for its delivery in the future. The buyer and seller agree on the price today, while the settlement occurs later.

In the spot market, you receive the asset immediately. In the futures market, cash settlement is often chosen without the actual delivery of the asset.

Futures allow the use of leverage for larger positions, but contain more complex mechanics and higher risk.

Advantages of Spot Trading

Simplicity and Transparency

Spot trading is the simplest way to start trading. You buy an asset – you receive it. No complicated calculations or liquidations.

Spot market prices depend purely on supply and demand. Unlike futures markets, where prices are influenced by funding rates, index prices, and marking, the spot market is the most transparent indicator of the fair value of an asset.

Lack of constant monitoring

You don't need to constantly check your position. In the spot market, this does not pose the risk of a margin call or liquidation. You can “set an order and forget” – the assets will remain yours regardless of price fluctuations.

Ease of Risk Calculation

If you invested $500 in BNB at a price of $300, you can immediately calculate your maximum risk. It's straightforward and clear.

Spot Trading Restrictions

Material liability for assets

When you buy cryptocurrency on the spot market, you take on its storage and security. You need a secure wallet or chosen protection. In the case of commodities like crude oil, there is the issue of physical delivery.

Futures contracts allow you to avoid these problems by settling in cash.

Limited profit potential

In the spot market, profit is limited by your capital. In futures or margin markets, the same amount of funds can generate higher income due to leverage.

Currency volatility for business

For companies operating in different countries, the Spot currency market means constant volatility of costs. Futures contracts allow to lock in the price in advance.

Practical Recommendations for Traders

Platform Selection

When choosing an exchange for spot trading, pay attention to:

• Commissions and their structure
• Liquidity of trading pairs
• Availability of assets you want to trade
• The security and reputation of the platform
• User interface convenience and analysis tools

Liquidity Management for Large Orders

For large volumes, consider OTC channels to avoid price slippage. Even liquid assets like BTC can experience slippage with excessively large market orders.

Combining Analysis

Spot trading is the foundation, but success depends on quality technical and fundamental analysis. Study charts, analyze news and market sentiment.

Conclusion

Spot trading is the most common and accessible way to interact with financial markets, especially for newcomers. It offers simplicity, transparency, and control over assets.

However, spot trading is not a universal solution. It has limitations in terms of profit potential and practical tasks related to asset holding. Understanding the advantages and disadvantages will help you choose the right strategy based on your goals and risk tolerance.

Start with the basics of spot trading, combine it with quality analysis, and gradually expand your knowledge of more complex instruments.