What is spot trading and how does it work in the cryptocurrency market

Spot trading is one of the main methods of exchanging cryptocurrencies on global financial markets. It involves a direct transaction between two participants who exchange one cryptocurrency for another at the current market price. Understanding the mechanics of spot trading is critically important for anyone looking to start trading digital assets.

Basic Definition of Spot Trading

Spot trading is the immediate exchange of crypto assets at the prevailing market price at the moment the trade is executed. For example, in the BTC/USDT trading pair, the pair’s price indicates how many USDT are needed to buy one BTC, or how many USDT can be obtained by selling one BTC.

A key feature of spot trading is that participants must own the underlying asset to sell it. Buyers and sellers instantly exchange quote tokens (e.g., USDT) for base tokens (e.g., BTC) at the time of order execution. There are no future promises or conditional agreements — everything happens here and now.

Spot Trading vs. Futures Trading: Key Differences

Spot trading and futures trading are two completely different approaches to trading cryptocurrencies. Understanding their differences is necessary to choose the appropriate trading strategy.

In spot trading, participants trade real assets that physically exist in their portfolios. The transaction is completed immediately, and both parties receive their assets.

Futures trading operates on a completely different principle. Participants agree to buy or sell a cryptocurrency at a predetermined price at a specified future time. This occurs on the so-called derivatives market, where assets are not exchanged physically. Instead, traders speculate on the price movement of the asset. They can open a long position (bet on price increase) or a short position (bet on price decrease).

Futures trading requires maintaining margin (a security deposit), the size of which depends on the applied leverage. This margin acts as a safety cushion to cover potential losses if the trade goes against the trader.

Spot Trading Compared to Margin Trading

Spot trading also differs fundamentally from margin trading, although both are conducted on the spot market.

Classic spot trading involves directly exchanging one cryptocurrency for another using only the trader’s own funds. You buy exactly as much as your capital allows.

Margin trading involves borrowing funds from the platform or other traders to expand your trading position. This allows a participant to trade volumes exceeding their own capital and simultaneously increases both potential profit and potential loss. However, interest is charged on borrowed funds, adding extra costs. Additionally, if market conditions move unfavorably, the system may initiate liquidation of the position.

Types of Orders in Spot Trading

Various order types are used on the spot market to implement different trading strategies:

Market Orders are executed immediately at the best available price in the order book. The trader specifies the amount of the asset to buy or sell, not a specific price.

Limit Orders allow the trader to set a maximum price for buying or a minimum price for selling. The order remains active until the set price is reached or the order is canceled.

Conditional Orders are triggered only when a certain price level is reached and then executed according to predefined parameters.

Each order type has its advantages and is used depending on market conditions and the trader’s strategy.

Fee Structure and the Role of Makers and Takers

In practice, trading fees typically amount to about 0.1% of the value of each executed order. This fee is not charged on unfilled parts of orders or canceled transactions.

It is important to distinguish between makers and takers:

Makers are traders who pre-set the volume and price of an order and place it in the order book. Their order waits for matching, increasing market depth and providing liquidity for other participants.

Takers are traders whose orders are executed against existing orders in the order book. They reduce market depth but enable quick transactions at the current price.

Risks and Limitations in Spot Trading

Each spot market has certain restrictions and rules designed to protect participants and ensure system stability.

Typical restrictions include a maximum number of active orders (e.g., 500 active orders, with the last 50 shown in the history) and a maximum number of conditional orders (up to 10).

For tokens classified as high risk, a maximum holding amount may be set, equivalent to 100,000 USDT, due to volatility and investment risks. For major tokens, such restrictions usually do not apply.

Each trading pair has minimum and maximum order sizes to prevent microtransactions or extremely large trades.

Account Management and Funding Trading Activity

To start spot trading, you need funds on a unified trading account of the platform. There are two main ways to fund your account:

Direct Deposit is used if there are no crypto assets on the account yet. The participant can deposit cryptocurrency directly from an external wallet.

Internal Transfer applies if the participant has funds on other accounts within the same platform. Assets can be transferred between different accounts within minutes.

Participants can also use sub-accounts to organize various trading strategies and risk management, provided the sub-account has sufficient balance on the main trading account.

Order History and Trade Tracking

For analyzing trading activity, it is important to distinguish several types of records:

Open Orders show operations that are still pending execution or condition fulfillment.

Order History displays all completed orders, including filled and canceled ones, with full details of each.

Trade History presents successfully executed trades. If a large order was filled in multiple partial executions, all will be reflected here.

This information is crucial for performance analysis and tax calculation.

Spot Margin Trading: Advanced Option

Some platforms offer spot margin trading, combining elements of spot and margin trading. This feature allows traders to borrow funds to increase their position on the spot market.

However, participants should remember that interest is charged on borrowed funds. Additionally, the system initiates liquidation when the loan-to-value ratio (LTV) reaches 92% or the maintenance margin ratio (MMR) reaches 100%. Liquidation involves automatically closing the position to prevent further losses.

Practical Tips for Spot Traders

Spot trading is a relatively simple way to start trading cryptocurrencies, but it requires understanding basic mechanics and risks. Before trading, ensure you have sufficient capital in your account, understand the types of orders you use, and are aware of market restrictions. Track your order and trade history for analytics and strategy optimization.

Successful trading requires patience, discipline, and continuous learning of market mechanics.