What is Spot Trading in crypto?

In Guides

Cryptocurrency exchanges are the best way to buy, sell, and trade cryptocurrency assets like BTC and ETH. As a crypto trader, you must be familiar with the concept of Spot Trading. But even if you are not, learning different crypto concepts and trading strategies is a lifelong process. That is why we have decided to help you familiarize yourself with the concept of Spot Trading.

What is the crypto spot market?

A Spot Market is a market where you can trade assets with other traders in real-time. As the name suggests, transactions are settled immediately or "on the spot" as soon as the buying/selling order is filled. As a buyer, you can purchase an asset with fiat or another cryptocurrency from a seller. More often than not, the delivery of the is immediate. But sometimes, it also depends on the asset being traded.

Spot markets exist in different forms like third-party exchanges and over-the-counter (OTC) trades. Third-party exchanges act as an intermediary between buyers and sellers, whereas OTC trades occur between buyers and sellers without an intermediary. Three essential components of every spot market are as follows:

- A buyer

- A seller

- An order book

Let's try to understand the concept behind spot trading using the following scenario:

A buyer enters the market with a specific buy price. This is the maximum amount they wish to spend to buy a particular asset. For example, trader A wants to buy 1000 USDT at $0.99 equivalent of BTC each. Once trader A is matched with trader B looking to sell 1000 USDT at $0.99 equivalent of BTC each, the order is executed and filled immediately. Similarly, sellers can also enter the market with a specific ask or sell price.

However, the concept of the Spot Market is not limited to cryptocurrencies. In fact, it applies to many different asset classes like shares, forex, and bonds. Some of the most prominent examples of spot markets are the NASDAQ or NYSE (New York Stock Exchange).

What is Spot Trading?

 
Here is a snapshot of the BTC/USDT spot market order book on Liquid. On the BTC/USDT spot market on Liquid, traders can trade their BTC for USDT or vice versa. You can either purchase some BTC using USDT or sell your BTC for USDT. In spot trading, you can only trade assets you own.
 
Screenshot 2021-08-02 at 00.25.44

As soon as your order is filled, new spot prices are updated accordingly. For example, when you trade your USDT for BTC, you take BTC liquidity away from the order book. It is known as a market order. In case you are wondering, a market order is one that automatically executes in real-time against the best possible price. A market order is a fast and convenient way to guarantee the execution of a trade.

A buy order at a price lower than the best sell price is immediately added to the order book. However, it will only execute when sellers agree to sell your assets at your desired price. It is also known as a limit order. The only disadvantage here is that there is absolutely no guarantee that someone will even agree to your price, and chances are your order may never execute.

You can buy assets at a lower price and selling them at a higher one to make money. That is where crypto arbitrage opportunities come into play.
 

Over-The-Counter or OTC trading


Over-The-Counter or OTC trading is also known as off-exchange trading. With OTC, a trade takes place between two parties directly rather than through a formal exchange. Off-exchange trades are facilitated by broker-dealers or market makers who communicate and negotiate with one another. Although OTC trading is not as regulated as exchange platforms, various policies and eligibility requirements do exist. OTC trading doesn't always have the best reputation compared to exchanges.
 

Limitations of OTC trading

 
- Less liquidity

You might encounter a situation where there are no buyers for what you want to sell or that you have to lower your price expectations a lot to find buyers.

- Less transparency

Unlike the order book model on the public trading platforms, OTC trading is not as transparent as exchanges. The reason being, the price not having to be publicly disclosed.

- Counterparty risks

OTC trading is more prone to counterparty risks where one party agrees to buy an asset from another at some point in the future, but one of the parties defaults prior to that contract expiring.
 

Centralized exchanges (CEX) vs. decentralized exchanges (DEX)

 
Centralized exchanges (CEX)

A centralized exchange acts as an intermediary between traders and as a custodian of the traded assets. Since all major centralized exchanges make the fiat trading pairs available for traders, all you need to do is load up your account with the fiat or crypto you want to trade. One of the major responsibilities of a serious centralized exchange is to make sure transactions occur smoothly. They also need to ensure other regulatory compliance, including KYC (Know Your Customer), AML (Anti-Money Laundering), security, and customer protection.
 
Decentralized exchanges (DEX)

A decentralized exchange or DEX facilitates direct peer-to-peer crypto transactions without an intermediary. The goal of decentralized exchanges is to facilitate transactions without users having to explicitly put their faith in facilitators. In short, you don't need to trust or distrust the platform making decentralized, peer-to-peer transactions possible since no centralized entity takes custody of your funds.
 

How do I make a spot trade on Liquid?

 
Spot trading on Liquid allows users to buy and sell crypto easily. All you need to do is follow these steps:

1. Sign in to your Liquid account. If you do not already have a Liquid account, make sure to sign-up for a new account on Liquid.
 
2. Navigate to Spot Trading by hovering over Trade in the top menu and clicking Spot Trading.

3. Choose the pairing you would like to trade from the drop-down menu. For example, if you want to buy BTC with USD, click BTC/USD. You can also choose crypto trading pair options.

4. You will discover the order book located in the middle of the dashboard. It simply determines the price at which other traders are willing to buy and sell the assets you want to trade.

5. You can then place a buy or sell order in the order form on the right-hand side of your screen. All you need to do is enter the price, quantity and then click Confirm to finalize your order.
Sign-up on Liquid

All guest authors’ opinions are their own. Liquid does not endorse or adopt any such opinions, and we cannot guarantee any claims made in content written by guest authors.

This content is not financial advice and it is not a recommendation to buy or sell any cryptocurrency or engage in any trading or other activities. You must not rely on this content for any financial decisions. Acquiring, trading, and otherwise transacting with cryptocurrency involves significant risks. We strongly advise our readers to conduct their own independent research before engaging in any such activities.

Liquid does not guarantee or imply that any cryptocurrency or activity described in this content is available or legal in any specific reader’s location. It is the reader’s responsibility to know the applicable laws in his or her own country.

WRITTEN BY

Liquid

Providing liquidity for the crypto economy.