Spot Trading - The Easiest Way to Start Investing in Crypto

The crypto market operates 24/7 and prices change constantly throughout the day. It’s unpredictable, volatile, and dynamic. For some, all this is too risky and discourages investment. For others, the opportunity to get rich quickly (while having a blast) is enticing enough to try many trading strategies. In this article, we will dig into the easiest way to start investing in crypto - spot trading.

What is Spot Trading in Crypto?

Spot trading is an investment that involves buying a good at the current market price and selling it when (if) its price rises in the future. This can be stocks, currencies, commodities, and, of course, cryptocurrencies.

Spot trading in crypto takes place in hundreds of cryptocurrency exchanges like KuCoin or Bitget, where buyers place an order to buy specific coins like Solana or XRP. If the order matches the price expected by the sellers (spot price), a transaction occurs, and the particular cryptocurrency goes to the new owner. Of course, purchasers can pay for cryptocurrencies with dollars or their local currencies (FIAT) and also trade across several cryptocurrency pairs. It's very simple.

The tricky part is to decide which coins to buy and when, as well as what is the best moment to sell them.

Basic terms

Here are some concepts you'll surely encounter as you dive into spot trading in crypto:

• Bid - represents the highest amount a potential buyer would pay for a cryptocurrency token.
• Ask - the lowest price a potential seller would accept.
• Bid-Ask Spread - a spread between offers represents the gap separating the highest purchase offer from the lowest selling price. This difference reflects the market's liquidity and trading costs - a smaller spread typically indicates a more active and efficient market.
• Order book - a trading ledger available at any cryptocurrency exchange that contains Bid and Ask prices.
• Market depth - shows the volume of orders to buy and sell a token at various price levels.
• Trade execution - refers to the process of completing a buy or sell order in the market.

Spot Trading - How to Start

It's like a quick tutorial on how to buy your first digital currency, with the difference that spot trading is fundamentally profit-driven.

Step 1: Sign Up

First, you need to choose a crypto exchange that you want to trade on and sign up. When choosing, look at:

• Geographic availability - consider that some exchanges might be restricted in your area.
• Fees and costs - exchanges charge various fees that you should be aware of
• Liquidity and trading volume - if you are new to crypto investing, we recommend starting with larger exchanges with a longer history
• User experience - choose a platform that is easy for you to use

Then, complete a registration process with your email address and personal information. You’ll also need to go through KYC (Know Your Customer) verification by submitting the required documents (usually your ID).

Step 2: Secure

This is basically a part of step one, but it's important enough to highlight.

Remember: when you set up an account (wherever on the Internet) to which you enter personal information and plug in a payment method, you must secure it perfectly. Elements like a strong, unique password, keeping your login credentials and recovery phrases in a safe place, and enabling Two-Factor Authentication (2FA) are a MUST! Also, after some time, consider moving your assets to a crypto wallet.

Step 3: Transfer Funds

To purchase your first cryptocurrency, you need to link your bank account or credit card to the exchange. Next, transfer fiat currency (like USD or EUR) to your exchange account. When money appears on the platform, you are eligible to trade.

Step 4: Place Order

At this point, you are ready to choose a cryptocurrency pair (like BTC/USD) and trade. However, before you take action, we advise you to read the rest of this article, where we discuss the benefits and risks and how to make data-driven decisions.

Pros and Cons of Spot Trading

Before you start fishing, it’s a good idea to learn about the main advantages and risks of spot trading.

Pros

• Easiness - spot trading is one of the most basic trading methods, so it’s beginner-friendly and easy to learn.
• Ownership - when you buy a cryptocurrency, it's yours, and you decide how long to wait for a return on your investment. This may seem obvious, but it is not, because other trading strategies do not assume ownership at all.
• Quick returns - due to volatility and fast price shifts, you can gain faster than you suppose.
• Low-risk - spot trading is one of the safest ways of investing. You can hold onto your investments without pressure, and the only thing you have to lose is what you've already invested.

Cons

• Volatility - prices in crypto shift very quickly, which can translate into significant profits, but also losses. The cryptocurrency market is unpredictable and therefore considered risky. It requires traders to be patient, vigilant, and aware of market trends.
• Low liquidity - the danger of liquidity drying up occurs when you use lesser-known exchanges and trade unknown currencies. You may then struggle to sell what you have acquired at a favorable price because there will be no buyers in the market.
• Need for security - because spot trading involves ownership of the purchased cryptocurrency, you are the one who needs to secure your digital assets against fraud and malicious activities.

How to Benefit From Spot Trading in Crypto?

As we mentioned earlier, the cryptocurrency market is surprising and unpredictable. However, you can limit the risk by following a few simple tips:

1. Start with thorough research about the asset you want to trade
2. Use reputable exchanges with high liquidity
3. Never invest more than you can afford to lose
4. Monitor market trends and news that could affect prices
5. Diversify your portfolio across different assets
6. Use only a portion of your capital for each trade
7. Learn from both successful and unsuccessful trades

The Significance of Data in Spot Trading

When you learn to make decisions based on data instead of intuition, you will enter a higher level of trading and be able to plan more effective spot trading strategies.

The question is: how to get historical and real-time crypto data? We explained this in a separate article, but in brief, the sources are several. For example, you can download data directly from the exchange you sign up for. However, if you want to easily collect data from multiple crypto exchanges and compare them with each other, you will need a Market Data API provider. With this tool, you can access data (even from the last 10 years) from more than 350 exchanges. This is an option for someone who wants to deal with spot trading more professionally.

Other Cryptocurrency Trading Strategies

As we said, spot trading is one of the simpler methods of investing in cryptocurrencies. Below are others:

Derivatives

Cryptocurrency derivatives are financial instruments whose value is derived from the price of an underlying cryptocurrency asset, such as Bitcoin (BTC), Ethereum (ETH), or others. Unlike direct ownership of the cryptocurrency (spot trading), derivatives allow traders to speculate on the future price movements of these assets without holding them physically. Common types of crypto derivatives include:

• Futures contracts - agreements to buy or sell a specific amount of a cryptocurrency at a predetermined price on a future date.
• Options - provide the right, but not the obligation, to buy or sell a cryptocurrency at a specific price before a certain date.
• Swaps - contracts to exchange cash flows or other financial instruments between parties.
• Perpetual contracts - similar to futures but without an expiration date, allowing for continuous holding of positions.

Arbitrage Trading

Arbitrage trading involves exploiting differences in the price of the same digital asset across different exchanges. Traders buy a cryptocurrency at a lower price on one exchange and sell it at a higher price on another, profiting from the discrepancy.

Learn more about arbitrage trading in crypto and 3 core statistical arbitrage strategies.

Scalping

Scalping is a high-frequency trading strategy where traders aim to profit from small price changes. This involves executing numerous trades throughout the day to accumulate small gains. In contrast to spot trading, scalping operates in very short time frames (seconds/minutes). Scalpers aim for small profits per trade but make many trades, while spot traders often look for larger price movements. Scalping usually involves trading bots or trading algorithms.

Market Making

Market makers provide liquidity to the market by simultaneously placing buy and sell orders for a particular asset. They profit from the bid-ask spread while facilitating smoother trading for others.

Read more about market making in crypto.

Staking

Staking involves holding and locking up cryptocurrency in a wallet to support the operations of a blockchain network, such as validating transactions. In return, stakers earn rewards.

Things to Remember

1. Spot trading involves buying cryptocurrency at the current market price and selling it when the price rises. It's considered the most beginner-friendly approach to crypto investing.
2. To begin spot trading, users must choose an exchange, complete KYC verification, implement security measures (like 2FA), connect a payment method, and transfer funds. Security is paramount, particularly regarding account credentials and asset protection.
3. While spot trading offers advantages like direct asset ownership and potential quick returns, it comes with significant risks due to market volatility. The key is to use reputable exchanges, never invest more than you can afford to lose, and diversify your portfolio.
4. Success in spot trading relies heavily on data-driven decisions rather than intuition. Traders should monitor market trends, conduct thorough research on assets, and consider using the Market Data API provider to access historical and real-time data from multiple exchanges.