The basics of entering the trading world is to comprehend the explanations of the key trading jargons. Among the most commonly used trading jargons, the most popular trading terms are spot exchange rate and cash rate. So, what do the two terms imply? Much to the convenience of beginners, both the terms are easy to understand and apply in the trading scene. Interestingly, most people confuse the two terms as they almost imply the same thing- but in reality, there is a stark difference between the two. Check out more about the trading market at multibank.io.
The post below will offer details on the two and the differences between them, followed by a brief on spot trading crypto scene- the most speculated trading market of the 21st century.
Spot exchange rate and cash rate
Well, before delving into the details, let’s take a quick view on the core concept of spot trading.
In spot trading traders settle the trade on the basis of the exact current rate – for the chosen commodity or spot trading crypto- in the present market in real-time. Also, the trade is settled immediately and the payment is paid upfront. This way, spot trading crypto or Forex is the exact opposite of forward trade. In forward trade, the payment is decided on the basis of a specific exchange rate- however, the trade is scheduled to be conducted on some later date, say after 2 months.
So, what is the spot exchange rate? Well. Spot exchange rate refers to the rate that is quoted as well as transacted on the current date for settlement on the 2nd working day. Spot trading takes 3 days to get completed- two working days and the trade date. However, this is in the case of the traditional trading market because the conventional trading market is not open round-the-clock and is open only on working days. For spot trading crypto, the trade might get settled within a single day only as the crypto trading zone remains open 24/7.
In regard to cash rate, things are far simpler. Cash rate refers to the rate that is decided to settle the trade on that very same day. Thus, the main difference between the two rates here is that the cash rate covers a much faster and immediate process while spot rate takes a few days.
Now, people might often use the two terms interchangeably as spot rate too refers to on-the-spot rate. However, it’s the time of settlement that makes all the difference here.
Spot trading in crypto
It’s to note here that the cash rate mostly applies in the currency or the FX market. When it comes to crypto, you don’t have much mention of the cash rate. However, spot trading is one of the most followed trading methods in the crypto zone.
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If you are just starting out in the crypto trading zone, it’s better to commence your trading journey with spot trading crypto.
Below is a brief on the benefits of spot trading crypto.
Simpler to grasp
Cryptocurrency is a new and complicated niche. It’s not an industry that you have been familiar with since decades. So, there is a good deal of research to do to get a strong grasp on the crypto market. What makes things more complex is that the crypto market scene is aggressively volatile. The market is not impossible but hard to predict- there are numerous indicators and historical price movements to study to predict the future rate of a crypto.
But, spot trading crypto relieves you from lengthy research work as you don’t have to make price predictions in this case. The trade will be settled based on on-the-spot price. If the price looks right for you, you will go for it. But, if you think the current price is not right for selling or buying, you can wait till you find the right spot price. This way, spot trading crypto is comparatively easier to follow compared to other crypto trading methods.
Window for negotiation
Beginner traders might not know but spot trading crypto allows a window for negotiation. This way, both the buyer and seller can talk and arrive at their preferred price. The room for negotiation is even greater if you conduct spot trading crypto from a P2P exchange.
No counterparty risk
This is surely one of the greatest benefits of spot trading crypto. In fact, this is one of the advantages that spot trading crypto enjoys over forward trading.
In spot trading crypto, the entire payment would be made upfront. Thus, there is no way that the buyer might dishonour the commitment of paying. In forward trading, there is always the counterparty risk. As the trading is settled at some later date, illicit buyers might not honor the commitment of payment.
Where do you settle spot trading crypto?
Well, when it comes to spot trading crypto, there are three kinds of platforms to choose from.
The most popular platform for spot trading crypto has to be cryptocurrency exchanges. You can choose from either centralized or decentralized platforms. In centralized exchanges, the whole trading is conducted in a centralized environment through an order book. But, the decentralized exchanges execute spot trading crypto through smart contracts-embedded AMMs. One thing to note, centralized exchanges charge higher fees than the decentralized ones. On the other hand, the processing speed is always faster with the centralized ones. If budget is a concern for you, go for the DEXs.
Then you can also conduct spot trading crypto via OTCs. These offer a comparatively more relaxed environment than the crypto exchanges. Also, you might find lesser rates with OTC trading than with crypto exchange trading. However, the crypto exchanges operate in a more organized framework and hence offer a more credible atmosphere for spot trading crypto.
The other option is P2P trading platforms. These are online trading platforms that are dedicated to crypto trading. Unlike crypto exchanges where the trading parties are always anonymous to one another, P2P platforms direct communication between sellers and buyers. Trading with P2P platforms comes with the added flexibility of setting your own rates, launching of discounts, advertisements of your portfolio to attract more buyers, and so on. Buyers have the facility to choose a trusted seller based on ratings from previous traders.