A public market in which cryptocurrencies are traded for immediate settlement. It contrasts with a futures market, in which settlement is due at a later date.
A public market in which cryptocurrencies are traded for immediate settlement. It contrasts with a futures market, in which settlement is due at a later date. Spot trading involves the purchase of crypto assets with a trader’s balance, which cannot be leveraged.
Traders can invest in spot markets only with their balance of crypto or fiat currency. A spot market trader buys a crypto asset worth up to the maximum account balance they have. In other words, spot trading does not allow traders to trade bigger sizes than their balance. This has the benefit of traders being able to hold on to their assets without the fear of being liquidated. On the other hand, spot traders, unlike in margin trading, cannot leverage their capital and go for bigger risk-reward ratios by trading with borrowed capital.
Spot market trading is thus an investment strategy that lends itself to tactics like dollar-cost-average to take profits when the asset is performing well. Crypto trading in this market is less aggressive than trading on the margin because the maximum downside a trader has is if the asset goes to zero. Therefore, this market is recommended to beginners to avoid FOMO and beginner mistakes, like chasing losses.
The spot market and the futures market differ in their underlying assets. On spot markets, traders buy the assets they are trading. On futures markets, traders buy rights to purchase the underlying assets. This is why futures markets are called derivatives since they derive their value from the crypto asset. Therefore, futures trading is more commonly used for short and medium-term trades and trades employing leverage. Spot market trades are best used for long-term investments since traders cannot get liquidated.