What Is a Spot Market?
A spot market refers to a public market where cryptocurrencies are traded for immediate settlement.
In this type of market, the transactions involve the direct exchange of cryptocurrencies or fiat currencies, and the settlement occurs instantly.
It contrasts with a futures market, where the settlement is scheduled later.
How to Trade in the Spot Market for Crypto?
Traders in the spot market can invest using their available crypto or fiat currency balance.
They can purchase cryptocurrencies up to the maximum amount of funds in their account balance. Spot trading does not allow traders to leverage their positions by borrowing funds, meaning they can only trade with the capital they possess.
While this restricts the potential for higher risk-reward ratios, it also eliminates the risk of being liquidated.
Spot trading is suitable for holding assets and avoiding margin-related risks.
Dollar-Cost Averaging
Spot market trading strategies often involve dollar-cost averaging, which entails regularly investing a fixed amount over time, regardless of market conditions.
It is considered a less aggressive trading approach, particularly recommended that beginners avoid impulsive decisions driven by fear of missing out (FOMO) or chasing losses.
Spot Market and Futures Market
The spot and futures markets differ in terms of the underlying assets involved.
In a spot market, traders directly purchase the assets they are trading, while in the futures market, traders acquire the rights to purchase the underlying assets later.
Futures markets are considered derivative markets since their value is derived from the underlying cryptocurrency asset.
Futures trading is commonly used for short to medium-term and leveraged trading, where traders can amplify their positions using borrowed funds.
On the other hand, spot market trades are often preferred for long-term investments, as they do not involve the risk of liquidation.