Spot

Spot

In the world of cryptocurrency, the term Spot generally refers to a transaction made on the 'spot' or a transaction that is settled immediately, or "on the spot". This is in contrast to futures contracts where settlement happens at a later date. When a user trades cryptocurrencies in the spot market, they are buying or selling the actual, underlying asset directly.

Definition of Spot

Spot Trading

Spot trading is the immediate delivery of a cryptocurrency. Once a spot trade is executed, ownership is transferred immediately and payment is exchanged straight away. Unlike futures trading, there is no delay between executing the trade and delivery of the asset or payment; it happens at the same 'spot' in time.

Advantages of Spot Trading

  • Immediate ownership: The buyer will acquire the cryptocurrency immediately and will have the ability to transfer, spend, hold, or sell at their discretion.
  • No settlement risk: Because the trade is settled 'on the spot', there's no risk of one party failing to deliver at a later date.
  • No margin, no leverage: Traders need to fully fund their purchase and cannot borrow additional funds, thus avoiding the risks of margin trading.

Disadvantages of Spot Trading

  • No time advantage: It is not possible to take advantage of movements in the price of the cryptocurrency at a future date.
  • Full upfront payment: Unlike futures or options trading, spot traders can't leverage borrowed money to make larger bets. They must make a full payment upfront on a spot trade.

Spot Market vs Futures Market

The major difference between the spot market and the futures market lies in the time when the trading transaction is performed. In the spot market, the physical delivery of currency or cryptocurrency takes place immediately or within a short span of time. On the other hand, in the futures market, the delivery is postponed to a future date.

The spot market prices are known as spot prices. They are the current market prices at which an asset—like stocks, commodities, or cryptocurrencies—is bought or sold for immediate delivery and payment. On the other hand, the futures market deals with the contracts that provide for the delivery of an asset at a specific time in the future.