What is Spot Trading?

Introduction

As a trading method that constitutes the financial market, spot trading promotes the development of the entire market with its simple, convenient and timely experience, and plays a vital role in capital circulation, value realization, and the balance of supply and demand.
Spot trading refers to the direct trading of spot assets, where the delivery of assets is completed in a timely manner after the transaction is concluded, with the buyer receiving the spot assets and the seller receiving the corresponding currency. This kind of trading usually occurs in the spot market, and the traded assets can be cryptocurrencies, commodities, forex, stocks and so on.

What is a Spot Market?

A spot market, as the name implies, is a financial market based on spot trading, with features such as openness, instant trading and delivery. Before understanding the spot market, it is necessary to learn what a spot is. The spot is the trading goods that already exist, like soybeans, oil, and gold in the traditional market while referring to cryptocurrencies, such as BTC, ETH, USDC in the crypto market. These cryptocurrencies can be traded and withdrawn to one’s wallet quickly.

The spot market is divided into trading in the exchange and over-the-counter (OTC), the former is to trade in the market with the help of third-party platforms who are responsible for transaction matching, and the cash or goods are withdrawn through the trading market after the transaction is completed. By contrast, over-the-counter is to trade outside the market which is usually conducted by COD.
However, there are also tradings through intermediaries, which are uncontrollable in risks and you need to be cautious.

What is Spot Trading?

Spot trading is a direct transaction between buyers and sellers of spot, either as a currency-to-good transaction or as a barter one. To be more specific in the crypto market, spot refers to cryptocurrencies while spot trading mainly refers to crypto-to-crypto trading, and most of the trading pairs contain stablecoins, such as USDC, USDT and DAI.

Investors can start crypto-to-crypto trading after purchasing stablecoins on major trading platforms. Select a trading pair (such as BTC/USDC) when logging into a trading page and place a pending order in the market/limit mode to the trading list. When the price of BTC is equal to or lower than the price on the pending order, the platform will automatically match the transaction and close the deal at the seller’s pending order price. The user will immediately get the BTC, which can be viewed in the account and withdrawn to the wallet at any time.

Places to Conduct Spot Trading

As mentioned above, spot trading is divided into trading in the exchange and over-the-counter. Among them, trading in the exchange can be further subdivided into centralized exchanges and decentralized ones, both have their own pros and cons.

Centralized Exchanges

Centralized exchanges (CEX) are managed by a centralized institution that provide convenient and secure trading for both parties and trades are aggregated between buyers and sellers by means of pending orders on the order book. Users need to register a trading account and finish KYC (identity authentication) before trading.

The advantages of CEX include:

1. Convenient trading and easy operation
2. Mature technology, stable servers, high transaction capacity and processing efficiency
3. Large number of users and total transactions, sufficient depth and liquidity
4. Strict risk control, high level of security

To start a trading, both buyers and sellers need to deposit their assets to the trading platform first, and then make a pending order. When the trading is completed, funds can be withdrawn to their personal accounts.

Decentralized Exchanges

Decentralized exchanges (DEX) have no centralized institution participating in the matchmaking. Decentralized trading in the crypto market is done by liquidity in smart contracts and implementing liquidity pricing based on algorithms. Users are able to provide liquidity to the trading pool or start trading directly, simply by connecting their wallets to the smart contract. The assets of users remain in their wallets throughout the trading process while users do not need to register an account or KYC.

The advantages of DEX include:

1. More open, any digital asset can easily open a trading pool and realize secondary market trading
2. All data is on chain and can be viewed by all users, making transactions more transparent
3. Assets remain in users’ wallets during the trading, and there is no risk of asset theft as long as the private key is finely kept
4. Users are able to start trading without identity authentication after connecting their wallets, which protects privacy more

Since it is much easier to list a new coin in DEXs as no audit is required, which gives chances to the so-called shitcoins. Users are recommended to keep a close eye on liquidity and risks while treading.

Over-the-Counter

Over-the-counter (OTC) refers to transactions outside the trading venue. Unlike trading in the fields, OTC does not require a fixed venue or platform, identity authentication, or strict rules. Trading parties mainly negotiate privately or through intermediaries in the form of one-to-one transactions, and the price is quoted through negotiation, rather than market pricing.

OTC exists certain risks as they are not guaranteed by a centralized institution. However, as a critical supplement to the financial market, it has become an important method of spot trading due to its flexibility and openness.

How to Conduct Spot Trading on Exchanges?

An account is needed for spot trading on the exchanges, go to the【spot trading】page after depositing or purchasing stablecoins (such as USDT/USDC), select a counterparty and then trade via market/limit pending orders.
Take the example of buying BTC on Gate.io:

First: Go to Gate.io and Login to Gate.io and sign up for an account with your email address.
Second: Go to “Wallet” and select the corresponding stablecoins to deposit if you already have stablecoins; otherwise, go to “Buy Crypto” and select “P2P Trading” to purchase stablecoins with fiat currencies.
Third: Click on “Spot Trading” under “Trade”.
Fourth: Search BTC and find the target trading pair.
Fifth: Set buying price and buying amount in “Limit Order”, then click on “Buy”, when the price of BTC is equal to or lower than the pending order price, the deal will be automatically closed.
The traded BTC will be automatically transferred to “Wallet”-“Spot Account”, and spot trading is done at this point. You can choose to store the BTC in the exchange wallet for further trades or withdraw it to your own wallet if you choose long-term investment rather than trading again in the short term.

Conclusion

As the most common trading method in the financial market, spot trading is relatively easy to get started. However, to make a wise and profitable investment, a comprehensive judgment based on fundamental information, market analysis, and operation strategies will be quite necessary. You should know that only the combination of comprehensive analysis, rational judgment and calm decision-making can make a good investment.