In this article, I will explain what exactly does Spot Trading mean, how does it work, and compare it to Futures Trading, in order to better understand it.
What is Spot Trading?
A spot market represents a market in which foreign exchange, commodities, or securities, can be traded “on the spot” with the buyer receiving the transfer instantly. It can also refer to the price that a commodity currently has and trades that take place immediately, and not on a later date.
It is seen as the most basic type of investment one can make. You simply need to buy a cryptocurrency, let’s say, Bitcoin, and hold it in order to either buy an altcoin or wait until its value increases.
You also have the option of converting fiat money into a stablecoin in order to buy an altcoin that got your attention.
In Spot Trading, after making a purchase, the investor is the actual holder of said crypto and enjoys economic benefits, such as taking part in staking.
How Does Spot Trading Work?
Thanks to spot trading, you can buy or sell crypto directly through a crypto exchange.
Usually, a transaction is completed instantly if the request is adjusted to the existing offer. You can buy coins or tokens that are already in circulation or new ones.
But this is not the only type of trading one can make, so let’s compare it with the other popular option: futures trading.
What Is Different About Futures Trading?
Futures trading is differentiated from spot trading by the fact that, in this case, you needn’t own the underlying asset.
Let’s take as an example a BTC/USD contract. In futures, you aren’t really buying or selling the Bitcoin itself, but the value of the contract is programmed to follow the price of the cryptocurrency. Basically, if the value goes up, so does the value of your contract, and if it falls, so does the value of the contract.
By doing this, you profit from the price movement without having to actually buy, own, or sell Bitcoin.
Meanwhile, the spot price is the dominating price for all spot transactions and the price is determined by traders and buyers through supply and demand.
Flexibility and Leverage
If you purchase crypto in the spot market, you only register a profit when the price goes up, but you don’t have any gains in a bear market. In the case of futures contracts, meanwhile, you benefit from short-term price movements in either direction.
As for leverage, it is worth mentioning that spot trading doesn’t have any. If you own $1,000, you have the possibility of purchasing crypto worth that amount only, while a futures contract offers leverage – but that’s a topic for another article.