Spot Market Introduction: Understanding Instant Trading from Scratch

Warning: Content is lengthy. Spot trading refers to the direct buying and selling of financial instruments and digital assets, such as Crypto Assets, forex, stocks, and bonds. Typically, asset Delivery occurs instantly. Spot trading takes place in the spot market, which can be of an exchange nature or OTC Trading (direct trading between traders). When trading in the spot market, you can only use assets you own—there's no leverage or Margin involved. To simplify the trading process, Centralized Exchange platforms regulate Compliance, ensure security, and provide asset accomplice services, among other things. In return, the platform charges trading fees. DEX provides similar services through smart contracts on Blockchain.

Why Spot Trading is Attractive

When entering the crypto assets field, most people first encounter spot trading—such as buying BNB at market price and holding it long-term. The spot market covers various asset classes, including crypto assets, stocks, commodities, forex, and bonds. You may be more familiar with the spot market than you think. Globally renowned markets like Nasdaq and the New York Stock Exchange (NYSE) are spot trading platforms.

Definition of Spot Market

The spot market is a public financial market where assets are traded instantly. Buyers purchase assets from sellers using fiat currency or other assets for payment. Delivery usually occurs immediately, but this depends on the type of asset being traded. The spot market is also referred to as the cash market because traders need to pay upfront.

The spot market exists in various forms. In most cases, trading is simplified by a third party known as an exchange. Additionally, you can also trade directly with other traders through OTC Trading.

The Core Mechanism of Spot Trading

The goal of spot traders is to make a profit by buying assets and expecting their prices to rise. When the prices rise, they can sell at a profit. Spot traders can also short sell - this involves selling assets and then repurchasing them when the prices fall.

The current market price of an asset is referred to as the Spot price. Through market orders, you can buy and sell assets at the best Spot price available on the exchange. However, be aware that the market price may change during the order execution process. Additionally, if there is insufficient available liquidity, your order may not be fully executed at the target price.

For example, if you place an order to buy 10 ETH, but there are only sell orders for 3 ETH at that price level, the remaining portion will be executed at different prices. The spot price updates in real time and continues to fluctuate during order matching.

The operation of OTC spot trading is different: traders can obtain a fixed amount of assets from their counterparty at a fixed price without going through an order book. Depending on the type of asset, delivery may take place immediately or may be completed within T+2 days (T+2 means the current date plus two working days).

Historically, stock trading required the transfer of physical certificates, while forex trading involved cash transfers or bank transfers. Today, electronic systems allow for almost instantaneous delivery. The cryptocurrency market operates around the clock, allowing for immediate trading at any time. In contrast, the delivery time for OTC or peer-to-peer trading is longer.

Trading Venue: Centralized and Decentralization

Spot trading is not limited to specific locations. Although most people conduct spot trading on trading platforms, you can also trade directly with other traders without the involvement of a third party. This type of trading is referred to as OTC Trading. Each spot market has its unique characteristics.

Centralized Exchange

Centralized trading platforms are divided into two categories: centralized and decentralized. Centralized platforms manage asset trading, including Crypto Assets, forex, and commodities. The platform acts as an intermediary between market participants and hosts the trading assets. Using a centralized platform requires first depositing fiat currency or Crypto Assets into an account.

Large centralized platforms must ensure continuous execution of trades, comply with regulatory requirements, complete user KYC verification (Know Your Customer), maintain fair pricing, and ensure security and customer protection. In return, the platform charges transaction fees, listing fees, and fees for other trading activities. Due to the large number of users and trading volume, the platform can earn stable fee income in both bull and bear markets.

Decentralization

Decentralized Exchanges (DEX) are another common way to trade Crypto Assets. DEX provides most of the services available on centralized platforms, with the main difference being that it uses Blockchain technology to match buy and sell orders. DEX users typically do not need to create accounts and can trade freely with each other, with assets not needing to be transferred to the platform.

Transactions occur directly between traders' wallets, facilitated by smart contracts—automated execution code on the Blockchain. Many users prefer DEX because it offers better privacy and freedom. However, these advantages come at a cost: the lack of KYC and customer service support can become significant drawbacks if issues arise.

Some DEXs use an order book model. There is also a newer model called Automated Market Maker (AMM), which adopts different pricing mechanisms through smart contracts. Buyers obtain funds from the liquidity pool for token swaps. Liquidity providers charge transaction fees from users in the pool.

OTC Trading

On the other hand, there is also OTC Trading. In this case, financial assets and securities are traded directly between brokers, traders, and dealers. OTC spot trading is organized using various communication methods, including phone and instant messaging.

OTC Trading has several advantages that are unrelated to the limitations of traditional order books. If you trade assets with low liquidity, such as small-cap tokens, large orders may lead to slippage. Exchanges often cannot execute orders at the expected price completely, so the remaining portions must accept worse prices. Therefore, large trades conducted via OTC methods often achieve better prices.

It is worth noting that even liquid assets like BTC can experience slippage when orders are too large. Therefore, large BTC orders also benefit from OTC Trading.

Spot Market vs Futures Market: Key Differences

We have discussed that spot market trading is completed almost instantly and delivers quickly. In contrast, futures market contracts delay payment. Buyers and sellers agree to exchange a certain quantity of goods at a predetermined price at a future point in time. When the contract expires, buyers and sellers usually settle in cash rather than delivering the asset.

The Difference Between Spot Trading and Margin Trading

Margin trading is available in certain spot markets, but it is fundamentally different from spot trading. As mentioned earlier, spot trading means you fully own the asset and receive it immediately. In contrast, margin trading allows you to borrow funds from a third party to pay interest, enabling you to open larger positions.

Borrowing gives leveraged traders the opportunity to achieve higher profits. However, it also increases potential losses, so caution must be taken to avoid losing the initial investment.

How to Perform Spot Trading on the Trading Platform

Spot trading on any regular trading platform is straightforward; you just need to register an account. Let's understand the layout of the trading interface and how to execute spot trading.

To access the trading platform, open the platform homepage, navigate to the trading area, and select spot trading. You will see a trading interface that includes multiple sections:

1. At the top of the page displays Crypto Assets trading pairs and market information, including daily changes and trading volume.

2. Order Book lists and sorts all buy and sell orders for the asset by price. Green orders represent buy orders, while red represents sell orders. When you place a market buy order, you choose the lowest asking price. If liquidity is insufficient to fully execute the order, the second lowest asking price will be used.

3. Price Chart displays customizable historical price data. The integrated technical analysis tools provide a wide range of analytical features.

4. Trading Pair Search Bar is located in the upper right corner, allowing you to select trading pairs and mark favorites with a star. You do not have to purchase Crypto Assets with fiat currency - if you hold other crypto assets, you can directly exchange them for the target token on the Spot market.

5. Order Creation Panel is used to place buy and sell orders. You can choose a limit order, market order, or stop-limit order. Let's look at the simplest spot trading: market order.

Assuming you want to buy Bitcoin (BTC) with 1000 USDT. Simply enter 1000 in the total amount field and click buy. The platform will immediately transfer USDT to the seller, and you will receive BTC worth 1000 USDT.

Advantages Analysis of Spot Market

The advantages of spot trading

1. Prices are transparent and determined by market supply and demand

This stands in sharp contrast to the futures market, which has multiple reference prices. For example, the futures mark price is determined by a combination of financing rates, price indices, and moving averages of basis. In certain traditional markets, interest rates can also affect the mark price.

2. Simple rules, predictable risks and returns

If you invest $500 in the spot market to buy BNB, you can easily calculate the risk based on the entry price and the current price.

3. Convenience of “Set and Forget”

Unlike derivatives and margin trading, spot traders do not have to worry about liquidation or margin calls. You can easily enter and exit positions at any time. If you do not plan to trade short-term, you do not need to worry about the amount of available funds.

Analysis of the Disadvantages of the Spot Market

The disadvantages of spot trading

1. May need to bear physical assets

It depends on the object of your trading. Taking oil as an example, if you purchase crude oil on the spot market, you need to receive physical delivery. For crypto assets, storing tokens and coins will make you responsible for their security. And through futures derivatives, you can also gain exposure to these assets, but settled in cash.

2. Certain entities require price stability

For example, multinational companies need to acquire foreign currency. If they rely on the spot market, their income and expenditure planning will become extremely unstable.

3. Limited profit potential

The potential profit from spot trading is much lower than that from futures and margin trading. In the futures and margin markets, you can trade larger positions with the same capital.

Summary

Spot market trading is one of the most common trading methods, especially for beginners. Although spot trading may seem simple, it is always beneficial to understand its advantages, disadvantages, and potential strategies. In addition to mastering the basics, you should also consider learning technical analysis and fundamental analysis, which will help you make more informed trading decisions.