Cryptocurrency trading, similar to traditional markets, comes in various forms with different levels of risk.
While complex strategies and tools like trading bots might be tempting, beginners can start by simply buying cryptocurrencies at the current market price, known as a spot order.
This straightforward approach, also called DCAing and HODLing, helps accumulate assets without unnecessary complications.
Spot trading has its pros and cons, but it provides a beginner-friendly entry into the crypto world.
Spot Orders in Crypto: What Are They?
Spot orders in crypto involve purchasing a cryptocurrency at the current real-time market price using fiat or other cryptocurrencies.
This instant trade execution method is known as spot trading.
Spot orders are popular among investors looking to hold assets for long-term profits or trade on spot exchanges for short to mid-term gains.
Also read: What Is APY In Crypto?
What is Spot Trading?
As mentioned, some users buy cryptocurrencies at the spot price to sell them later.
Of course, the aim is to sell them at a higher price to complete the trade with a profit.
And that’s exactly what spot trading is.
But remember—buying speculative assets is always risky.
Although many cryptocurrencies have amassed value over time, not all have fared so well.
Thus, make sure you do your research before throwing all of your savings into your favorite coin.
How Does Spot Trading Work in Crypto?
Spot trading involves buying cryptocurrencies at a low price and selling them at a higher price to make a profit.
The key difference from regular crypto investing is that in spot trading, you have to sell to complete the trade and realize your profit.
Spot trading can be done on various platforms such as centralized exchanges (CEX), decentralized exchanges (DEX), or over-the-counter (OTC) trades.
Each platform uses different trade mechanisms: CEXs rely on orderbook models, DEXs use smart contracts and automated market makers (AMMs), and OTC trades involve trade dealers.
After purchasing assets, you can sell them on these platforms to profit if the asset’s price increases.
Benefits of Crypto Spot Trading
Now you know all about the premise of what spot trading is and how it works in the cryptocurrency industry, let’s explore some of its advantages.
Simplicity
Spot orders in cryptocurrency trading are straightforward: you buy the asset at its current market price without the need for complex wallets or tools.
This simplicity makes spot trading ideal for strategies like HODLing and DCAing.
HODLing means holding cryptocurrencies long-term, hoping for value increase, while DCAing involves buying a fixed amount of cryptocurrency at regular intervals regardless of the current spot price.
These strategies can be effective for long-term investors.
Accessibility
Another key advantage of spot orders is their accessibility.
To explain, spot orders are possible on multiple platforms and are available in almost every country in the world.
This makes crypto spot trading incredibly accessible for everyone.
Less risk than many other crypto trading strategies
Before you get carried away, it’s important to note trading always comes with some risks.
However, when you compare spot trading with leverage trading, the former comes with the lowest relative risk.
That’s because leverage trading involves taking out loans, which could put your assets at risk.
On the other hand, spot trading just involves buying and selling an asset at its immediate price.
Arguably, it’s also lower risk than crypto futures trading too, as the market is so speculative that buying a cryptocurrency without knowing what the market could do is also a risk.
Risks of Crypto Spot Trading
Cryptocurrencies are invariably volatile and crypto trading also comes with its fair share of risks ranging from exchanges’ bank runs to hacks and attacks.
Market volatility
Crypto markets are highly volatile. Anyone spot trading cryptocurrencies must be extremely careful of this to avoid losing a major chunk of their capital to price fluctuations.
Liquidity crunch
Liquidity can become a concern for spot trading during bear markets. If the liquidity of an asset dries out, traders may be unable to sell their asset or face high slippage during trades.
Trading platform
In spot trading, the platform’s security matters as much as asset prices.
Centralized exchanges have faced issues like bankruptcy, leading to fund lockouts.
Research is crucial when choosing such platforms.
Decentralized exchanges (DEXs) offer self-custody, giving users ownership control, but they might be less beginner-friendly than centralized options.
Spot Trading vs. Leverage Trading: What’s the Difference?
Margin or leverage trading allows traders to borrow funds, increasing buying power for larger trades but amplifying potential gains or losses.
In contrast, spot trading uses only the amount in your wallet, offering lower returns and risks.
Here’s an overview of the differences between spot and leverage trading.
Crypto Spot Trading vs. Derivatives
Crypto derivatives, like contracts for differences (CFDs), derive their value from cryptocurrencies but don’t require owning the assets.
Traders speculate on crypto price movements through futures or options, where they commit to buying or selling cryptocurrencies at a predetermined future date regardless of the asset’s current price.
This differs from spot trading in a few key ways:
Asset ownership
When you buy an asset from a spot market, assuming you hold the asset in a non-custodial wallet, you actually own the asset.
When trading derivatives, however, you only own a digital representation of the actual asset.
Time for execution
Spot trading is immediate, meaning a trade is completed as soon as the order meets the target buy or sell price.
Plus, you can hold the assets for as long as you want.
Derivatives trading, on the other hand, is limited to a specific time in the future.
Fees
The only fee associated with spot trading is the transaction fee or the exchange fee.
The trader can hold the crypto asset for any period without paying any extra fees.
This is opposed to derivative traders, who need to pay taker or maker fees.
This is alongside holding fees required for traders to keep their positions open.
How to Spot Trade Crypto Securely?
The simplest way to trade crypto assets is through a centralized exchange (CEX), resembling stock trading.
However, CEXs are custodial and lack true ownership.
An alternative is Ledger Live, a secure interface enabling easy and controlled spot trading.
It allows buying and selling using trusted solutions like Moonpay, Ramp Network, and Binance without compromising private keys.
Your funds remain protected on your Ledger device.
Here is a 5-step method to buy crypto using Ledger Live:
Step 1: Open the Ledger Live app and connect it to the Ledger wallet.
Step 2: Pick your preferred crypto on-ramp service.
Step 3: Choose the cryptocurrency and enter the ‘buy’ amount.
Step 4: Select your mode of payment and add the necessary payment details.
Step 5: Pay the amount and you will receive the crypto in your Ledger wallet.
Once you’ve funded your wallet, you can connect it to a range of DEXs or choose a Ledger Live-integrated DEX like Paraswap to start spot trading with your assets.
Spot Trading: Final Thoughts
Spot orders in crypto vary based on users’ strategies, whether it’s HODLing with dollar cost averaging, spot trading for mid-term profits, or other unique approaches.
Despite being simpler, spot trading isn’t risk-free.
Thorough research on cryptocurrencies is essential, and staying updated with market news and developments aids in identifying investment opportunities.