What Is Spot Trading in Crypto?

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Most people start their crypto journey with spot trading rather than advanced trading, such as futures. But what is spot trading in crypto, and how does it differ from the futures market or options? To better understand crypto spot trading, it’s helpful to understand the origin of the term. Spot trading for any tradable asset refers to its price right now, “on the spot.” However, spot trading also means instant delivery, which differs from advanced trading types like futures or options.

The price of a crypto asset will likely be different in the future. The spot price refers to the right-here, right-now price rather than future price movements. In this guide, we’ll discuss ways to trade the crypto spot market and how spot trading works.

Spot Trading in Crypto Explained

Spot trading in crypto is buying or selling a cryptocurrency in exchange for another cryptocurrency or a traditional fiat currency. Trading digital assets on the spot market implies instant delivery, an immediate exchange of one asset for another at current market prices.

Most commonly, spot trading occurs on an exchange like Coinbase or Binance, both of which offer easy ways to buy or sell cryptocurrencies. However, beneath the quick-buy widgets, there’s a more complex market underway.

In most spot trades, people buy Bitcoin or another cryptocurrency using a traditional currency like the US dollar. Conversely, selling Bitcoin or another crypto for cash is also a spot trade. The key to making it a spot trade rather than a derivative trade is that you’re buying or selling the real asset with immediate delivery.

How Does Spot Trading In Crypto Work?

Under the hood of simple trading widgets, a few mechanisms are at work. If you use an advanced trading platform, you can see these in action. Spot trading uses an order book, which is a list of open buy or sell orders on the exchange.

The order book lists limit orders, which are fixed-price buy or sell orders for the given trading pair. Trades shown at the top are limit sell orders, whereas the bottom of the order book displays limit buy orders. When placing a trade on an advanced trading platform, you can choose a limit order or a market order. A market order buys or sells at the prevailing market price, using the existing orders in the order book to fill your trade.

The example below uses a limit buy order with its price set 1% below the current market price. This order will be filled if Bitcoin’s price falls by 1% and sellers offer enough Bitcoin at that price to fill the order. Alternatively, if someone sells with a market order and the market has reached the limit order’s price, this limit order helps fill the market sell order.

Simple trading interfaces abstract these order-book mechanics, providing an easy-to-use point-and-click interface to buy or sell. However, these simple trades are often costlier for two reasons. Trading fees are typically higher, and they usually use a “spread,” which is an internal price markup that lets the exchange lock in a predetermined price for your trade.

Crypto Spot Trading With Margin

Some exchanges, such as Kraken and Binance, offer margin trading. In a margin trade, you use your assets as a type of collateral called margin to borrow funds for a trade.

For example, Kraken supports 5x margin trades for qualified traders in some countries. With 5x margin trading, you can control up to $500 worth of crypto with $100 worth of margin. However, if the trade loses 20% in this example, the margin you used as collateral will be sold to cover the trading loss. While margin isn’t a derivative trade, it’s not what most people think of when it comes to spot trading.

Order Book vs. OTC: Types of Crypto Spot Markets

In most cases, if you’re using a centralized exchange like MEXC or Binance for spot trades, you’re making these trades with the help of an order book. We described this structure earlier: Limit buy and sell orders populate the order book to provide trading liquidity.

However, it’s also possible to make an over-the-counter (OTC) trade. In an OTC trade, the sale never shows on the transaction tape. OTC trades occur when two willing parties agree on a trade at a certain price. Institutions often use this method of trading to move large amounts of crypto without affecting price movements.

If Alice wants to buy 100 bitcoins and Bob wants to sell 100 bitcoins, they can complete the trade over the counter. Some platforms, like Binance.us, as shown below, cater to both large and mid-sized OTC trades.

Binance.us uses a spread rather than a trading fee for OTC trades. Buyers pay slightly more than the market price, and sellers receive slightly less than the market price.

OTC trades typically use an intermediary, such as an exchange or broker, to help ensure a safer transaction.

Compare Crypto Spot Trading Fees

For most order book trades, you can expect to pay trading fees, which are typically a small percentage of the trade amount. However, some platforms use a flat fee for trades below a certain threshold.

Crypto spot trading fees can add up quickly, taking a slice of your profit with each trade, so it pays to learn the fee structure for the exchange you plan to use. Be aware that simple-trade widgets often have the highest fees (and a spread), whereas advanced trading platforms usually bring lower fees. The tradeoff for these lower fees is a more complex interface.

On the low end, the MEXC exchange may offer the lowest trading fees. However, this platform is no longer open to traders in specific jurisdictions, including the US. If you’re in a supported area, trading fees for MEXC can be as low as 0.0% for limit orders and 0.02% for market orders.

• • Limit orders are also called maker orders because these orders make liquidity for the market.

• • Market orders are also called taker orders because they take liquidity from the market.

Binance is also known for low spot trading fees. Fees for Binance Advanced Trade start at 0.1% for most pairs, with additional discounts based on trading volume or if you pay the fees with the BNB token.

Trading fees can be much higher on other platforms. For example, Coinbase charges 0.60% for maker orders and 1.2% for taker orders, making it one of the costlier advanced trading platforms. However, most advanced platforms offer lower fees based on 30-day trailing trading volume, as shown below on the Coinbase Advanced fee schedule.

Binance and MEXC typically have some of the lowest crypto spot trading fees, although these platforms aren’t available in some countries, such as the US and Canada.

Spot Trading Fees for Popular Exchanges

Let’s compare the current trading fees for some exchanges, assuming a $1,000 BTC spot trade and a new trader with no volume discounts.

It’s also wise to look beyond trading fees when trading in crypto. Platforms with lower fees may not have the same level of regulation. Several exchanges have come under fire from regulators in various countries. For example, regulators in Hong Kong, Germany, and Japan have warned consumers that the MEXC exchange is unlicensed in these jurisdictions. A lower trading fee may not be worth the risk of potentially losing access to your crypto assets on the exchange.

Pros and Cons of Spot Trading in Crypto

Trading crypto in any type of market brings risks due to the higher volatility of crypto assets and the risk of regulatory changes. However, spot trading has both pros and cons compared to other types of crypto trading methods, such as futures trading.

Futures trading refers to buying or selling contracts that are bets on the future price of a given asset. Traditional futures have an expiration date and require delivery of crypto assets. Perpetual futures can be held indefinitely and typically settle in crypto or stablecoins when you close the position. Let’s examine some of the pros and cons of crypto spot trading compared to contracts like futures trading and options (the option to buy or sell at a given price). Contracts of these types are derivative contracts.

Derivatives like futures contracts bring higher leverage choices, sometimes as high as 125x. While leverage allows you to multiply your earnings, losses are also amplified, making derivative trades riskier. Spot trading eliminates this risk of liquidation and offers a less stressful trading experience. When the trade is complete, you own the crypto assets you purchased.

Types of Platforms for Spot Trading

We’ve primarily discussed crypto spot trading on centralized exchanges (CEXs), where most traders get started with crypto trading. However, there are other ways to make spot trades, including decentralized exchanges (DEXs), over-the-counter (OTC) trading, and peer-to-peer (P2P) trading.

• • CEX: A centralized exchange acts as an intermediary, allowing traders to buy or sell cryptocurrency using traditional fiat currencies like the US dollar or other cryptocurrencies.

• • DEX: A decentralized exchange uses smart contracts to facilitate trades. Smart contracts are computer programs that run on the blockchain using conditional statements. If this happens, then do that. DEXs operate using liquidity pools, which are deposits of tokens, with an algorithm governing the exchange rate between the pool’s tokens. The all-time volume for Uninswap, the most popular DEX, approaches $1.8 trillion.

• • OTC: Over-the-counter trades are negotiated exchanges for sales by large investors or institutions.

• • P2P: Peer-to-peer exchanges refer to one person selling to or buying from another person. Platforms like Binance offer P2P trades, and several apps, such as Bisq, help buyers and sellers find trading opportunities.

Each type of platform has its advantages, depending on your trading priorities. DEXs, for example, offer access to tokens that may not be available on exchanges yet. Trading fees may also be lower compared to centralized exchanges.

OTC trades and P2P trades are not recorded in exchange trading volume and do not affect the chart. P2P trades have become popular for traders who value privacy or who live in an area that restricts crypto trading. In both cases, spreads add cost the the trade.

Is Spot Trading Risky?

Spot crypto trading is considered riskier than traditional investments due to crypto’s higher price volatility. However, that same volatility can be credited with the outsized profit opportunities found in crypto trading.

Choose your long-term trades carefully. According to data from CoinGecko, a leading crypto data aggregator, more than half of all cryptocurrencies have failed. That statistic does not reflect spot trading but crypto investments in general.

Spot trading on exchanges is considered one of the safer ways to trade cryptocurrencies. The lack of reliance on leverage and the ease of navigation make spot trades safer than derivatives like futures contracts. There are some risks, however. Let’s highlight a few areas that merit extra caution.

Slippage

The term slippage refers to receiving less value than expected in a trade. You can avoid slippage by using limit orders and reduce slippage by trading smaller amounts when using market orders.

Smart Contract Risk

DEXs use smart contracts to allow trading without an intermediary. While the larger DEXs have been audited multiple times and are battle-tested, smaller decentralized exchanges and management tools may still have vulnerabilities.

Emotional Trading

According to several studies, the majority of day traders lose money. Often, the culprit is emotional trading rather than disciplined trading. Learn about technical indicators and develop a trading strategy.

Market Manipulation

Traders in crypto spot markets can be bullied by crypto whales or duped by fake volume, which is called wash trading.

Scam Tokens

DEX spot trading brings another risk in the form of scam tokens. Some tokens contain malicious coding that prevents the trader from selling after making a purchase. This is one of the more insidious types of crypto rug pulls.

Exchange Insolvency

Countless crypto exchanges have disappeared or frozen withdrawals from the platform. Research exchanges carefully before making a deposit. Once you’ve chosen an exchange, consider withdrawing your crypto funds to a non-custodial wallet after you’re done trading.

Conclusion

Spot trading refers to buying or selling cryptocurrencies at the current market price, with immediate delivery. Limit orders allow you to trade the spot market with precision by setting a price and waiting for the market to come to you.

While crypto spot trading is one of the easiest ways to trade, there are several ways to trade the spot market. The most popular of these is through centralized exchanges, like MEXC, Binance, or Coinbase. Other options include DEX trading, which is becoming increasingly popular, as well as OTC and P2P trades.

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