Why is spot trading safe?
Date of publication: 21.10.2022
Time to read: 5 minutes
Date: 21.10.2022
Read: 5 minutes
Views: 347

Why is spot trading safe?

Spot trading offers easy ways to invest and trade assets, including cryptocurrencies.

Different types of assets have their own spot markets, meaning there are markets for stocks and bonds, forex, commodities, and cryptocurrencies.

Spot markets include centralized and decentralized exchanges, as well as over-the-counter trading.

Let's take a closer look at what the spot market is, why it is safe and how to make money on it.

Any type of exchange and trading on it has its own strengths, weaknesses, peculiarities and difficulties.

Despite the fact that spot trading is considered to be one of the easiest, besides its advantages, it also has its weaknesses.

What is the difference from trading in futures

If you trade futures carelessly, you may get liquidated. If you are not liquidated, you will have to hold the position until you close it. Until the position is closed, the exchange requires you to pay funding fees. Futures are a trading instrument. In fact, there is no asset as such, it is trading in future liabilities. There are fixed-term \ open-ended. Read more about how to avoid liquidating a futures bot in the article.

When trading occurs on a spot, you buy an asset and own it. If there are distributions from the project that owns the asset, you will receive them, as you are the holder.

If the price goes in the wrong direction on the spot, you become an investor, waiting for the price to rise. You can withdraw your assets to a cold wallet and wait for the price to rise. In doing so, you lose nothing.

The key point is that on the spot you can turn the bot into a short and trade the drawdown without freezing your funds.

That is, you can set the bot in such a way that it will sell the asset upwards: the more the price rises, the more the bot sells. In case the price falls, the bot will buy back cheaper than it sold.

There is no such thing in futures - you already have a contract. If there is a big minus on it, you can hedge it - open an opposite position. But if on a spot you are trying to resell an existing asset, on futures it is the conclusion of a new contract. In other words, you need extra money to hedge a minus position.

Advantages of trading on spot

Transparency of prices, which are set by supply and demand on the market itself. Unlike the futures or derivatives market, where there are certain reference prices, which are made up of many factors.

You can calculate in advance how much you risk or how much you will earn when investing in certain assets at certain exchange prices.

Disadvantages of spot trading

The exchange forces traders to keep assets that are inconvenient to hold. Acquisition of cryptocurrencies that seem to be easy to store imposes certain obligations and responsibility on the trader for their storage and use.

On a spot with a small amount of funds you can earn a small percentage of your deposit, unlike futures contracts where you can leverage and increase your percentage of deposit much faster.

The volatility of certain assets, as well as companies and individuals involved in the buying and selling processes. For example, when entering into transactions with foreign companies and individuals, it is necessary to stock up on the foreign currency of the country with which it is planned to trade, relying on a single spot market in this case is very reckless.

For all its simplicity and, at first glance, favorability, the potential profit from trading on spot markets is less than on futures, marginal, futures. (of course, if you do not have a small deposit).

Everyone needs to weigh for themselves the pros and cons of spot exchanges and trading on them. Undoubtedly, spot trading is a promising and safe direction for working with investments of different types.

Any interaction with the exchange carries a certain percentage of risk, but trading with correctly configured bots is the easiest way to avoid most problems and mistakes.