Spot trading is one of the most common types of trading, usually for buying and selling stocks, bonds, commodities, currencies or other financial instruments. Spot trading is usually done directly through the over-the-counter (OTC) or through an exchange.
In the cryptocurrency market, spot trading is for direct transactions between cryptocurrencies, where one of the cryptos is used as the unit of denomination to buy other cryptos. The rules of cryptocurrency trading are to aggregate transactions in order of price priority and time priority to directly exchange between cryptocurrencies. For example, in the case of BTC/USDT trading pair, it refers to the direct transaction between USDT and BTC, where one side of the transaction exchanges USDT for the other side's BTC, and both sides no longer hold the original cryptocurrency after the transaction is completed.
Features of Spot Trading
Because spot trading is a type of trading that requires immediate delivery of assets and payment of the corresponding denominated currency by both parties to the transaction, its execution is relatively fast. At the same time, spot trading generally has no asset requirements for traders and is highly accessible to both retail and institutional traders. Compared to derivatives trading such as options futures, the fees for spot trading are also relatively low.
In addition, spot trading is generally more about going long directly, i.e. buying low and selling high. If a two-way trade is required, i.e., to sell high and buy low, it is usually done with the help of leverage.
Types of Spot Trading
Spot trading includes limit order and market order based on the price settings:
Limit Order: Users set their own buy or sell prices, which will appear in the order book after the order is placed. The transaction will only be filled if the counterparty has a matching price, i.e., if the market price reaches that price. If the market price does not reach the set price, the limit order will remain in the order book waiting to be filled;
Market Order: Market order means that instead of setting a buy price for trading, the system will complete the transaction based on the latest market price at the time of placing the order, and the user only needs to enter the quantity of the order he/she wants to place. Usually, because market price trading is the latest market price when placing an order, when the price fluctuates greatly, the actual price of the transaction may be different from the original price you want to place an order.
Venues for Spot Trading
Depending on the trading venue, it is usually divided into over-the-counter (OTC) and on-the-counter (OTC) exchanges, which in turn include centralized and decentralized exchanges.
Centralized Exchange
A centralized cryptocurrency exchange (CEX) is managed by a centralized institution, which records pending orders between buyers and sellers through an order book and conducts aggregation. To trade on a centralized exchange, traders generally need to first register for an account and transfer their assets to the exchange's wallet.
Decentralized Exchanges
A decentralized cryptocurrency exchange (DEX) has no centralized institution involved in management and aggregation, but instead completes transactions through liquidity in smart contracts deployed on the blockchain, combined with algorithm-based implementation of pricing. Any user can provide liquidity to the trading pool or connect their wallet to the smart contract to make a trade. When trading using a decentralized exchange, users do not need to register an account or undergo KYC authentication, and the corresponding assets exist in their own wallets.
Over-the-counter (OTC) Trading
Over-the-counter (OTC) trading refers to direct trading that takes place outside of an exchange. Unlike trading on the CEX or DEX, OTC trading does not have a fixed trading platform. The two sides of the transaction are mainly traded directly on a one-to-one basis, or through an intermediary to negotiate quotes.
Since OTC transactions are generally initiated directly by both parties separately, they carry a certain level of risk. However, when some institutions make large transactions, they usually do so through OTC transactions to avoid any impact on market prices. As a key complement to the financial market, OTC trading has become an important way of spot trading because of its flexibility and openness.
Disclaimer
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Crypto investment involves significant risks. Please proceed with caution. The course shall not be considered investment or financial advice.