Crypto spot trading refers to the buying and selling of cryptocurrencies for immediate delivery and settlement at the current market price. This guide explores spot trading and why immediate settlement is important.
The Characteristics of Crypto Spot Trading
There are three key components of crypto spot trading: the buyer, the seller, and the order book.
The idea is a trader will be able to gain a profit from these sorts of trades over the long term by buying when a crypto asset’s price is low. They can also sell after there has been an increase in the exchange rate with other assets. Beyond these basic participants, crypto spot trading is defined by several distinct characteristics:
Direct ownership of assets
Unlike derivatives or futures trading, where you trade contracts based on price movements, spot trading involves the actual delivery of the cryptocurrency.
When you buy Bitcoin on the spot market, you own the private keys (or the exchange holds them on your behalf), allowing you to transfer the coins to a personal wallet or use them for transactions.
Lack of leverage
Spot trading uses only the capital you currently have. You cannot lose more than your initial investment because you are not “borrowing” funds to increase your position. This makes it generally lower risk compared to margin or futures trading, as there is no risk of liquidation unless the asset price hits zero.
Immediate settlement and transparency
Spot trades settle instantly. The order book provides a transparent, real-time look at market depth, showing all pending buy and sell orders. This allows traders to see the exact levels of supply and demand, which helps in making informed decisions about entry and exit points.
Simple pricing mechanics
The price of a crypto asset in the spot market is determined by the “mark price”—the current market rate.
There are no funding fees, premiums, or complex interest rates involved, making it the most straightforward way for beginners to enter the crypto market.
What is a Crypto Order Book?
While the buyers and sellers in the crypto spot market are self-explanatory, the order book can be a bit more difficult to visualize without visiting a real crypto exchange. The order book is effectively the current buy and sell orders that are available for traders to take on an exchange.
There are two different types of orders that can be placed on the book: buy orders and sell orders. The buy orders will be displayed in green, while the sell orders will be shown in red. Exchange users have the option of either accepting an order that is already in the order book or creating a new order of their own at a different price point.
It should be noted that over-the-counter (OTC) trading is also a type of spot trading, but it works a bit differently from traditional trading on centralized exchanges. For example, there is less transparency due to the lack of public disclosures on executed trades.
What Are the Best Exchanges for Crypto Spot Trading?
In the early days of cryptocurrency, all exchanges were based around spot trading. These days, most of the trading takes place on various derivatives trading platforms. That said, most of these derivatives-based exchanges also offer spot trading to their users.
Three of the best crypto exchanges that offer spot trading to their users right now are Coinbase Pro, Binance, and Kraken.
One of these three exchanges will be the best option for crypto spot trading in most countries around the world; however, the specific option that is best for you will depend on various factors such as the availability of certain crypto assets for trading and the level of liquidity available for your preferred trading pairs on each platform.
United States users cannot use Binance and will need to opt for the specialized Binance US offering.
One of the world’s most trusted and secure crypto exchanges with low fees and advanced trading tools.
A regulated U.S. exchange tailored for simplicity, security, and fiat integration.
Can You Do Crypto Spot Trading on Decentralized Exchanges?
Yes, you can spot trade cryptocurrency on decentralized crypto exchanges.
One of the more recent developments in the world of crypto spot trading has been the development of decentralized cryptocurrency exchanges. These types of exchanges allow users to trade crypto assets with each other without having to put any trust in a third-party custodian of funds.
In traditional, centralized exchanges, users usually have to hand over custody of their crypto funds into the hands of a centralized third party; however, there are some instances where non-custodial trading is possible via centralized platforms.
The real difference when it comes to decentralized exchanges is that the more advanced platforms do not have their order book. For example, Uniswap crypto exchange, which is the most well-known decentralized exchange on the market, works on a system of reserves deposited into smart contracts by liquidity providers instead of matching buy and sell orders placed over time.
Despite the lack of an order book, decentralized exchanges powered by liquidity providers, such as Uniswap, can still be defined as crypto spot trading because the crypto assets that are purchased from the exchange are instantly delivered to the buyer.
That said, it should be noted that there are still some types of decentralized exchanges, such as Bisq, that use more traditional order books. However, as the case against EtherDelta showed, it is important for an order book used in a decentralized exchange to not be a point of centralization that can be targeted by regulators.
Differences Between Spot Trading and Futures Trading in Crypto?
The main alternative to crypto spot trading is known as futures trading. In the futures market, a trader is betting on a derivative of their crypto asset of choice rather than taking ownership of the asset directly.
Over time, derivatives trading has become much more popular than traditional spot trading in the crypto market. This is true for those who are more interested in speculating on short-term price swings rather than holding a particular cryptocurrency over the long term.
BitMEX is a useful example exchange to use when talking about trading derivatives because this platform does not offer spot trading at all. Users can deposit and withdraw bitcoin to and from the platform, and this is the only asset that can be used for trading. That said, there are a wide variety of different crypto asset derivatives that can be traded on the platform.
Instead of trading bitcoin for another crypto asset, users can bet on future price movements of the crypto asset by placing a bet with their bitcoin holdings. The trade is collateralized with bitcoin rather than the user actually receiving any of the alternative crypto assets in their exchange account.
In addition to betting on the price movements of non-bitcoin assets, users can also gain greater exposure to bitcoin’s own price swings through the use of leveraged trading.
It should be noted that futures trading is known to be riskier than simple crypto spot trading, especially as the amount of leverage used increases, as traders can get margin called and lose all of their collateral. Much like crypto spot trading, there are also various platforms that enable futures trading in a decentralized manner.
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