What Is Spot Trading in Crypto?

Spot trading is the most popular way to invest in cryptocurrencies. Trades are settled ‘on the spot,’ meaning buyers and sellers receive their assets almost instantly. This is unlike other crypto products, such as futures and margin trading, where positions are settled at a later date.

In this guide, we provide a comprehensive answer to the question; What is spot trading in crypto? We explain how spot trading works, its benefits and drawbacks, and what other options exist in the market.

How Does Spot Trading In Crypto Work?

Let’s take a closer look at how crypto spot trading works.

The key takeaway is that trades are confirmed on the spot, at the current market price. This means the assets, whether that’s crypto or fiat, are delivered to traders immediately. This is usually to the trader’s web wallet.

Moreover, spot trading is only possible when available funds are in the exchange account. For example, if you have 500 USDT, the maximum trade size is 500 USDT, less fees. As mentioned, spot trading is typically done via market or limit orders, which we explain in more detail in the following sections.

Market Orders in Spot Trading

Market orders are popular with beginners. They allow traders to buy or sell cryptocurrencies at the next best available price. The order will be matched with limit orders that are already in the exchange’s order book.

This means market orders can suffer from slippage if there’s limited liquidity. As such, the trader gets a slightly worse price than they had hoped for.

• For example, suppose the buyer wants to purchase $1,000 worth of a small-cap meme coin.
• The current spot price is $1.
• However, only the first $700 is matched at $1.
• The next $300 is matched at $1.20 – 20% higher than the original spot price.

That said, slippage is rarely an issue when trading large caps like Bitcoin and Solana. There’s substantial liquidity available, so market orders are sufficient. Nonetheless, it often takes less than a second for market orders to be matched. The respective assets will be transferred to the trader instantly.

For instance:

• You buy $2,000 worth of BTC with USD.
• You get an average price of $57,862.89 per BTC.
• You receive 0.035 BTC in exchange for that $200.
• The 0.035 BTC is available in your exchange wallet.
• Conversely, the seller gets $200 for the 0.035 BTC they sold.

Limit Orders in Spot Trading

Limit orders are the best option when crypto spot trading. This is also the case in other financial markets, such as equities and ETFs. This is because limit orders allow you to choose the price at which the trade is executed.

However, the trade is only confirmed once the limit order aligns with the spot market price. This might never happen, meaning the limit order remains pending until it’s canceled.

Nonetheless, here’s an example of how limit orders work when spot trading crypto:

• Let’s say you want to buy ETH.
• The current ETH/USD price is $2,400.
• You want to buy ETH when the price hits $2,300.
• You place a limit order at $2,300.
• The limit order is executed when the spot price is $2,300.
• Until then, the limit order will not be matched.

Do note that limit orders are often filled in increments. Especially when trading cryptocurrencies with limited liquidity levels.

For example:

• You want to buy one of the best Solana meme coins.
• It has a market capitalization of just $1.5 million, so liquidity is limited.
• The meme coin’s current price is $2.30.
• You place a $5,000 limit order at $2.50.
• The price increases, and $3,000 is matched at $2.50.
• This leaves $2,000 unfiled.
• You amend the limit order and reduce the price to $2.40.
• The remaining $2,000 is matched at $2.40.

Ultimately, while limit orders are ideal for getting the best spot trading price, there’s no guarantee they’ll be filed. This is why market orders can be a great alternative if you want to get the trade through instantly.

Margin in Spot Trading

Margin trading allows investors to purchase more cryptocurrencies than their account balance allows. For example, suppose the platform has a margin requirement of 20%. This means you only need $200 to place a $1,000 order. Put otherwise, you’re securing leverage of 5x.

Now, similar to spot trading, margin trading positions are executed immediately. However, they’re not settled in real time. This is because you’re borrowing funds from the platform. And, if the margin trade declines by a specified percentage, the position will be liquidated.

This means the trade is closed, and you lose the margin balance (or more in some cases). As such, you never directly owned the cryptocurrencies being traded. In contrast, spot trades are always settled as soon as the orders are filed. This means delivery is instant, and ownership is secured.

Types of Crypto Spot Markets

Still asking the question: what is spot trading in crypto?

Here’s a summary of the main types of spot trading markets:

Exchange Order Books

The vast majority of spot trading volume occurs on centralized exchanges. CoinGecko data shows that about $85 billion was traded in the past 24 hours. Centralized exchanges use the order book system. As we’ve established, this consists of market and limit orders.

The order book will have ‘bid’ and ‘ask’ prices, which determine the respective coin’s spot price.

• The bid price is the maximum amount buyers are willing to pay.
• And the ask price is the lowest price sellers are willing to accept.

These orders must be matched between buyers and sellers for the trade to go through. The assets are then delivered in real time.

In addition, traders should also be aware of order book depth when spot trading. This dictates the price movement based on the available liquidity and the size of new orders.

For example:

• Suppose you buy $1,000 worth of BTC via a market order. This will have no impact on the Bitcoin price, considering it’s a trillion-dollar asset.
• However, consider a $1,000 buy order on a micro-cap token with a $500,000 valuation. Even at just $1,000, this could cause a major price increase. This is because there’s limited order book depth.

OTC Trading

Over-the-counter (OTC) trading technically sits in the spot trading category too. This is because, just like the order book system used by exchanges, OTC trades are settled immediately. However, the process before settlement is achieved is different.

To start with, OTC trading is aimed at traders with large capital requirements, such as institutions. OTC minimums vary depending on the broker but often exceed $100,000. Crucially, OTC trades are carried out away from exchanges.

Instead, a broker helps buyers find a seller based on the required assets and amount, and vice versa.

• For example, suppose an institution wants to buy $1 million worth of BTC.
• They might source $600,000 worth of BTC from one seller. And the remaining $400,00 from another.

Once OTC deals are agreed, the assets are transferred and settled on the spot.

Crypto Spot Trading Pros and Cons

The benefits and drawbacks of crypto spot trading are summarized below:

Where Should You Spot Trade Crypto

Crypto traders have many options when spot trading online.

The most popular options are listed below:

• Centralized Exchanges: The most common spot trading method is to use a centralized exchange like MEXC. You can spot trade thousands of cryptocurrencies, including some of the best altcoins.  No commissions are charged when placing limit orders. Market orders cost just 0.02% per slide. MEXC, like many exchanges, benefits from deep liquidity and high trading volumes.
• Decentralized Exchanges: Although decentralized exchanges (DEXs) don’t use order books, they can still be considered spot trading platforms. This is because trades are settled at the current market price, which is determined by liquidity pools. Moreover, trades are settled almost instantly, with traders typically receiving their crypto assets in seconds.
• Crypto Swap Sites: Another spot trading option is crypto swap sites. These platforms offer a simple way to convert one crypto for another. OKX is a great option; you can instantly convert hundreds of cryptocurrencies without paying additional fees. Exchange rates are sourced from external liquidity providers. The swapped coins are directly added to your OKX wallet.
• Peer-to-Peer Sites: Spot trading is also possible on peer-to-peer exchanges. You’ll purchase cryptocurrencies using local payment methods, with the funds transferred directly to the seller. However, do note that prices are determined by sellers, rather than order books. For example, a seller might want to sell $500 worth of ETH at $2,363.68. This means you’d get about 0.21 ETH for that $500.
• OTC Brokers: Another spot trading option is OTC brokers. However, this will only be suitable if you have a large amount of crypto to buy or sell. As mentioned, this often needs to be at least $100,000. Nonetheless, OTC traders typically get favorable prices.

Is Spot Trading Crypto Risky?

Crypto spot trading is risky from a financial loss perspective. Like any financial market, you can lose money. Especially when trading cryptocurrencies, which are notoriously volatile and speculative. That said, spot trading is less risky than derivative products like margin or futures trading.

For a start, derivatives invite leverage, which amplifies gains and losses. Derivative positions can be liquidated, too. This means you lose the margin balance and the trade is closed automatically. In addition, you don’t own the underlying cryptocurrencies when trading derivatives.

Instead, traders simply hold a contract with the derivative exchange, which is settled at a later date. That said, spot trading exchanges still come with counterparty risks. Most platforms are centralized, so you need to trust that you’re trading in fair market conditions and that withdrawals will be honored.

Alternatives to Crypto Spot Trading

We’ve now answered the question: what is spot trading in crypto? Next, let’s look at some alternative marketplaces:

• Crypto Futures: Futures allow traders to speculate on cryptocurrencies without taking ownership. This includes perpetual futures, which never expire, and delivery futures, which are settled on a specified date. The best crypto futures trading platforms support leverage and short-selling.
• Crypto Options: Another alternative to spot trading is crypto options. Similar to futures, they invite leverage and short-selling. However, options are less risky, as you can only lose the upfront ‘premium.’ This is often a small percentage of the overall trade value.
• Crypto CFDs: Contracts-for-differences (CFDs) track crypto prices in real-time, so they’re another derivative type. Most CFD trading platforms support leverage and you can choose between long or short orders.
• Crypto Presales: Another option is to invest in crypto presales. These are fundraising events that sell new cryptocurrencies to early investors. The tokens are only listed on spot trading exchanges once the presale event is over. Presale buyers typically get the lowest price.

Conclusion

In summary, spot trading allows buyers and sellers to trade cryptocurrencies, often via order books. Trades are settled instantly once prices are matched, meaning the crypto assets are delivered in real time.

Spot trading is the best option for long-term investors, although those with more advanced strategies might consider derivative markets like futures and options.

FAQs