Although broadly similar, spot trading in digital assets and in traditional financial markets differ in fundamental as well as practical aspects — enough to merit contrasting assessments of value, risk and opportunity.
The hallways of the investment industry can be challenging to navigate, even for the experienced. They are lined with risks that may lead to investment pitfalls undermining the unwary.
Whether you are a novice or an experienced trader, trading strategies can help you minimize those risks, even making a tidy profit or hedging your losses. Spot trading is one of those strategies, and in this article, we look at how it differs between the digital and traditional financial markets.
What Is Spot Trading?
Spot trading is the sale or purchase of financial instruments such as stocks and foreign currencies for immediate delivery. What makes spot trading different from any other trade like futures trading is that delivery is immediate or as immediate as possible when you consider the foreign exchange market.
A wide range of assets can be traded using spot trading. Some of them include stocks, cryptocurrencies, commodities, etc. Financial markets that support spot trading are known as spot markets.
Spot trading can be done in both traditional financial markets and cryptocurrency markets. They both follow similar principles, but there are slight differences in the way they play out in practice. We will look at the features, similarities, and differences between spot trading on the cryptocurrency market and that on traditional financial markets.
But first, what are the benefits and disadvantages of spot trading?
Benefits of Spot Trading
Spot trading offers several advantages, some of which include:
- The prices of assets in spot trading are transparent and reflect the market.
- There is no fixed expiry time for spot positions, which can be beneficial for long-term trading.
- Calculating risk is easier and more accurate due to its simplicity.
- Spot trading does not always require the trader’s close attention.
- Transactions are immediate.
- Arbitrage prospect is open.
Disadvantages of Spot Trading
- Very little planning needs to go into spot trading, and in volatile markets, the prices of assets at first may not rightly reflect their actual value. This can lead to an increased risk of loss.
- Irregularities in spot trades cannot be rectified after the transaction is complete. Having a short transaction time can make these irregularities difficult to point out in time before the transaction ends.
- Market prices could change during the transaction, causing traders to finish at a loss.
- In cryptocurrencies, spot trading is affected by the volatility of the market. Buyers might not find a good time to sell to make a significant profit if the value of the cryptocurrency isn’t stable.
Spot Trading in Digital Assets
Trading in the cryptocurrency market is not for the faint-hearted, as the last few months have shown. Market volatility makes the value of coins vulnerable to erratic dips and increases. But even with such an unpredictable ecosystem, there are trading strategies that are so basic that they protect even inexperienced investors — spot trading being one of them.
Spot trading in crypto is simply the process of directly buying and selling coins – Bitcoin and altcoins – with instant delivery. But there’s more to spot trading for the beginner and veteran trader. It’s more than just being able to exchange cryptocurrencies for cryptocurrencies or fiat instantly. It’s about profit. How? One word: HODL.
“HODL”, the act of retaining ownership of a coin and not selling, came about as a drunken misspelling by a user on a crypto platform back in 2013. It has also come to stand for “holding on dear life”.
Spot trading makes it easy for individuals like you and me to quickly purchase coins during a dip and hodl them until the price is favorable enough for a tidy profit. That’s largely how spot traders make profits on their coins. While effective, spot traders have difficulty maximizing profits because they can’t always tell when the coins in their wallets would appreciate.
Despite this, spot trading is one of the safer (at least less risky) trading strategies in crypto. At the very least, it guarantees a profit as long as you hodl patiently. So, how do you spot trade and get on this profit bandwagon?
Most crypto exchanges like BTSE provide spot trading services for users by creating facilities specifically for spot trading. Some exchanges even aid their users with profit maximization tips on their spot trades.
First, you start spot trading by making a bid or placing an ask on the order book. This book contains the current offers for a particular asset. It is also updated constantly such that at any point in time, the order book includes the more recent prices for a trading pair.
For example, if you want to trade USDT for BTC, you have to view the order book to know what ask and bid prices are available before making a market order.
Spot Trading in Traditional Financial Markets
The concept of spot trading remains the same in traditional financial markets. In the traditional financial market, spot trading is the immediate exchange of commodities, assets, options, securities, stocks, futures, and other financial instruments between dealers and traders.
Just like the crypto spot market, traditional spot markets have different exchanges. The large ones include the New York Stock Exchange and the Chicago Mercantile Exchange. Of all these exchanges, the most prominent spot trade market globally is the foreign exchange market which trades approximately $5 trillion every day.
This is a type of spot trading that occurs in traditional financial markets. It’s a market where financial securities and assets are traded directly between brokers, traders, and dealers. It is different from an exchange because it does not require any third party to broker a trade. Trades are made directly from buyer to seller.
Order books are also not used in these trades. Instead, transactions are arranged via the use of different communication channels like texting and phone calls.
Key Differences: Digital vs. Traditional
When it comes to spot trading, cryptocurrency markets and traditional markets differ in three key aspects:
Spot trading in decentralized markets offers unique advantages — one of them being privacy and the ability for traders to trade cryptocurrencies directly with each other. Although spot exchanges in the crypto space provide essential services as traditional spot markets, users have more anonymity in crypto than in traditional markets.
With the crypto market open 24/7, spot trades can happen at any time of the day or night. Traditional financial markets do not offer traders such flexibility. They open and close trading at specific times. Traders have to trade within this time or miss out.
Spot trading works best when transactions happen quickly. Unfortunately, it usually takes t+2 days to complete transactions in traditional financial markets. In the crypto market, transaction times are quicker and occur as soon as a match is made between the bid and ask offers.
Either — or Both?
Spot trading is one of the most straightforward and most basic forms of trading, especially for inexperienced traders. It is also among the most common ways to enter the markets, whether in digital or traditional finance. Both present contrasting types of assets, volatility ranges, and opportunities, among other distinctions.
So which of those markets is best for spot trading? That depends entirely on you as a trader, your risk levels, what you’re trading, or your investment goals. Both markets have their advantages and disadvantages. Then again, why choose? Some may trade in both, of course, given an ample supply of funds and expertise.
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Note: BTSE Blog contents are intended solely to provide varying insights and perspectives. Unless otherwise noted, they do not represent the views of BTSE and should in no way be treated as investment advice. Markets are volatile, and trading brings rewards and risks. Trade with caution.