Ever since the creation of blockchain technology gave rise to cryptocurrency, more exciting investment possibilities are unlocked for traders. If you are keen to get started in the world of crypto, there are various ways to trade this new asset class, among which spot trading is one of the most popular. For individuals new to crypto investment, you may wonder what spot trading is. Spot trading is executing a crypto trade immediately for fiat money or another crypto at the available asking or bidding price in the market. But before you dive right into crypto spot trading, it is crucial first to have a thorough understanding of what it entails to determine if it fits into your overall financial goals. To help you out, here is a breakdown of the pros and cons of spot trading.
Advantages of Spot Trading Crypto
One of the main advantages of spot trading crypto is its simplicity. With spot trading, you immediately buy or sell cryptocurrency based on the prevailing market price rather than the speculated value of the financial instrument. This straightforward process eliminates the need to deal with complex contract terms and advanced investment concepts such as leverage, reducing the barrier to trading.
When spot trading crypto on an exchange, the spot market prices you trade at are typically known to all parties. This enables traders to better determine their gains or losses when planning out their investment strategies, and it can be helpful for new crypto investors who are less experienced.
3. Maximize Gains
By allowing traders to trade crypto assets rapidly, spot trading empowers you to capitalize on market opportunities actively and easily. As a bonus, as spot trading deals directly with the asset, traders are free to hold their investment until a better price is available, allowing them to amplify their return on investment.
Disadvantages of Spot Trading Crypto
1. Volatility and Lack of Planning
While quick trade execution can work in favor of crypto spot traders, it also exposes them to the volatility of the crypto market. Without any mechanism to act as a barrier to impulsive trading decisions, investors may become more vulnerable to emotional crypto trading, which can lead to significant losses.
2. Ineffective Way to Hedge
Another downside of spot trading is that it is an ineffective way to hedge. In the world of crypto, hedging is a risk management technique used by traders to mitigate losses from volatile markets. It involves opening a trade that will perform in the opposite direction of the position you take so that you can offset or limit your loss even when the value of your core investment declines. However, in spot trading, an asset’s price is determined based on the market price at that point in time. Thus, unlike other forms of trading such as futures and options trading, there is no means of protection to enable investors to sell cryptocurrency at a fair price that counters its decline in value.
3. Lack of Leverage
When spot trading, investors also do not borrow capital to increase their investment. This limits the extent to which they can take advantage of good trading opportunities to increase their profits.
Amplify Your Crypto Spot Trading Position with BIT
By offering a straightforward means to trade cryptocurrency, spot trading brings a level of convenience to individuals looking to leverage market opportunities quickly. Meanwhile, its simplicity enables it to serve novices well, making it a flexible strategy that can be used to help new and seasoned investors alike achieve their varied goals. As with all other forms of trading, spot trading has upsides and downsides. However, with a comprehensive understanding of its limitations, investors will be better equipped to avoid its pitfalls. Apart from getting grips with how spot trading works, choosing the right trading platform can do wonders in closing gaps in your investment strategy, and this is where BIT comes into the picture. Designed to help traders amplify their returns, BIT operates on a sophisticated Unified Margin system. Under this system, trades can be executed based on your total US dollar holdings. This affords greater capital utilization and allows you to offset different positions you hold against each other, making up for the intrinsic limitations of spot trading. Sign up for an account on BIT or browse our comprehensive resources today to explore how BIT can augment your trading strategy and help you take greater strides toward your financial goals.
This article should not be taken as financial or investment advice. Making an investment or financial decision is a choice. Do your research!
BIT is a full-featured cryptocurrency exchange that is designed for use by professionals. It provides services such as the execution of trading strategies, price discovery, and liquidity provision. BIT is always working to encourage the creation of innovative new financial products, improve the trading tools available to users, and offer a wide variety of tokens. Trade with confidence knowing that the platform is built with institutional-grade security and risk management measures in place. Sign up for BIT and switch on your future. Sign up on BIT, and switch on your future.