Due to its high volatility and movements in price, crypto has become the new form of investing for many new and veteran traders. Much like the stock market, intelligent traders have the possibility to trade both using their original investment and scale into larger positions using funds they borrow on margin. Spot trading crypto has opened up new avenues for traders to speculate on the price movement of crypto assets and thus increase their own capital over time.
What is Spot Trading in Crypto?
Spot trading is askin to day trading or buying physical goods such as gold or silver in an atempt to lock in a trading profit as the price (and underlying value of the asset) moves to net you a profit when you sell the crypto token/asset.
Spot trading crypto is different from one of the more standard strategies of trading cryptocurrencies which suggests that traders buy and hold crypto tokens for a long period of time to capture gains in price fluctuations over a longer period of time (this may be weeks, months, or years). This trading strategy is also used in stock trading and is known as “swing trading.”
Where Can New Traders Spot Trade Crypto?
New traders have a few different places they can begin to spot trade crypto assets and each has its own benefits and risks to be aware of:
Over The Counter (OTC)
Over-the-counter crypto spot trading typically occurs outside of traditional exchanges and peer-to-peer networks. Dealers/brokers act as facilitators (aka market makers) in these transactions in which they quote specific prices at which they’ll buy/sell crypto assets. OTC trading has the reputation of being cheaper than centralized exchanges due to the added costs. The price of trading is often not disclosed to outside parties.
Peer-to-Peer
New and veteran spot crypto traders have the opportunity to trade with other traders outside of the centralized exchanges. Peer-to-peer trading is similar to OTC trading where intermediaries and third parties aren’t involved in the exhange of assets.
Centralized Exchanges (CEXs)
Centralized Exchanges (CEXs) are similar to major brokerages and traditional stock exchanges which facilitate large-scale transactions using the order book model which matches pairs of buyers and sellers. These exchanges are also called “market makers” by the investment community.
Examples of Spot Trading
There are several examples of spot trading in the crypto market that can give you an idea of how spot trading in crypto functions and how new and veteran traders are often able to generate gains from short-term price fluctuations.
The core idea of spot trading in crypto: the main strategy is for traders to buy crypto assets at a low price and then resell them for a profit at a higher price as many times as possible to gain significant profit.
Note: spot trading crypto can be risky and new traders (and those who are specifically new to trading crypto) should exercise caution while trading.
To illustrate how spot trading crypto works, consider the following trades where Dave (a new crypto trader) chooses to attempt to gain profit by spot trading Bitcoin (BTC) and a popular stablecoin Tether (USDT to USD) which has historically been pegged o the US Dollar ($).
Example 1:
Dave uses his main crypto trading account at FTX to purchase 1 BTC at a price of 38,862.50 USD and strategically waits until the price for BTC increases to 40,000 over the next day on a flurry of news that new ATMs will be installed in major supermarkets like Trader Joe’s and Whole Foods Market.
Over the next two weeks, the price fluctuates back to support at 38,850 USDBTC and Dave continues to buy and sell BTC leveraging his profits to scale up his investment to gain a higher ROI on his original investment.
Example 2:
Dave wanted to diversify his investments and instead of only trading BTC and other crypto assets, he decides to invest in Tether to allow him to capture minor fluctuations in the crypto asset’s price. He continues to do this each day and (while some of his trades weren’t profitable), at the end of the week he ends his trading week with a positive gain of an average of 20% on his trades.
What are Spot Markets?
Spot markets are markets that allow traders to buy and sell assets such as BTC, Tether, and ETH at current market prices. Transactions that occur in spot markets are settled “on the spot” or immediately. Often, transactions traditionally occurring in the stock or options market may take 1-3 days to settle and thus cash is often “on hold” until final settlement occurs.
Risks Associated With Spot Trading
- Risk #1: It’s possible to lose your entire capital investment if proper money management is not exercised.
- Risk #2: Regulations don’t exist in a large portion of the crypto spot market which can result in new traders falling for scams, hacks, and phony investment opportunities
- Risk #3: Potential gains may be limited compared to margin trading.
Benefits of Spot Trading Crypto
There are many benefits to spot trading crypto which can be both risky and generate profit for the saavy/knowledgable investor.
- Benefit #1: Spot trading is less risky compared to trading strategies which rely solely on margin.
- Benefit #2: Spot trades are easy to manage and execute in real-time. You can easily measure your risk or gains using sophisticated tools and new dashboards provided by crypto exchanges.
- Benefit #3: Spot traders are able to take advantage of clearer prices and more accurate prices.
- Benefit #4: Spot trading allows traders to stake their assets and use their crypto assets for a multitude of different services.
Start Spot Trading Crypto Today
Begin to build your crypto token portfolio today with FTX. Join millions of users worldwide who are spot trading crypto, purchasing rare NFTs, and enjoying all the benefits the crypto market has to offer.
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