what is a spot market

In this article, we’ll describe what a spot market is, give some examples, and demonstrate the relevance of spot markets in the cryptocurrency industry.

Let’s start by understanding that there are two types of places where you can buy and sell tradeable assets; a futures market and a spot market

In the futures market, when you buy an asset, you don’t immediately receive the underlying asset. Instead, you have a contract to buy or sell the asset at a later date. So the transfer of the asset does not take place when the futures contract begins. Additionally, the money does not change hands until the predetermined date.

While the futures market encompasses transactions in which payment and delivery of the underlying asset take place later, in a spot market, the exchange of currencies for other assets is almost immediate. When an investor or trader makes a buy or sell on the spot market, the assets in question are transferred close to the same time money changes hands, and at the “spot price”. Usually, a two-day settlement period is standard.

Spot markets may also be referred to as physical or cash markets, as they entail the near-immediate trade of the actual asset upon payment.

What is a Spot Price?

Every asset that is listed on an exchange shows a current price or spot price. Such assets include stocks, commodities, and currencies. The spot price indicates what will be paid for an asset that is being bought or sold immediately. 

Since much of this type of trading is done on a global scale, spot prices, though they may be specific to an exchange’s region and time zone, generally are about the same across all exchanges.

In contrast, a futures price is agreed upon for payment and delivery of an asset at a later date. Additionally, the spot price holds a certain significance in determining the futures price. Futures contracts and other derivatives can enable buys and sells with a locked-in price that is based on the spot price and market predictions. This allows these types of investors and traders to help mitigate the risk of using spot prices, which fluctuate constantly. Prices in the cryptocurrency markets are notoriously volatile.

On many exchanges, you’ll generally see the spot price as well as a futures or “forward” price.

Who uses spot markets?

There are many types of reasons for using the spot market, from day trading to changing out foreign currency, to stockpiling a commodity. Someone wanting to trade out fiat for another financial instrument can go to a spot market to make the exchange. Both parties in each spot market transaction go into it knowing they are agreeing on the price at that given time (the spot price).

For example, a trader making a stock buy will go to a spot market, usually an exchange, and use the spot price to purchase the stocks. In this case, the actual transfer of assets may take up to 2 days. But in general, in a spot market, buys and sells are considered an immediate change of hands. As part of an agreement to make a transaction, both parties agree to use the spot price for payment purposes.

Many exchanges that are spot markets also provide a platform for futures contracts, so these markets are not exclusive to spot price trading.

Examples of spot markets

Spot markets developed around traditional assets such as stocks, and commodities like oil or wheat. For instance, the following exchanges are spot markets:

In the image below from the NYSE website shows the most recent spot price:

spot market NYSE
New York Stock Exchange (NYSE) spot prices

Cryptocurrency spot markets

For traders that want to buy and sell digital assets, cryptocurrencies now have their own niche of spot markets –  cryptocurrency exchanges (as well as some Over the Counter markets, which we’ll get to below). On the exchange rating section of CoinMarketCap, we see over 300 crypto exchanges, most of which are spot markets. Examples include:

Check the image below to see the spot price for the BTC/USD trading pair on the Binance.us cryptocurrency exchange:

spot market Binance
Spot market price on Binance.us

As a new sub-niche of spot markets, we now have decentralized exchanges that have no central authority and run autonomously. Often referred to as a DEX, these exchanges have order books with the spot prices just like centralized exchanges. A few examples are:

Check the image below to see the spot prices on the Waves DEX in their order book on the right:

spot market Waves DEX
Waves DEX spot market

What is a non-spot transaction?

Non-spot transactions refer to futures. The price according to the spot price may be agreed upon when the contract is initiated. But the delivery of the assets, as well as the transfer of funds, happens at some agreed upon date in the future. 

Derivatives markets, such as BitMEX, are not spot markets as they deal with different types of contracts. Again, payment and delivery of the assets take place at a later date.

To give some context, a good example of a non-spot market, or a futures market, would be the Chicago Mercantile Exchange (CME). This exchange is for buying and selling futures and options

Over the Counter Exchanges and Spot Markets

An Over the Counter (OTC) market is one in which traders buy and sell directly from each other. This is in contrast to the previously mentioned exchanges like Kraken and Euronext, which have a centralized platform for all the trades to go through. OTC markets can be spot markets, as well as deal in futures. 

Conclusion

Spot markets have evolved during the past few years as cryptocurrencies have taken the stage. Not only do we have a different type of asset, but access to exchanges has also morphed. In the current crypto climate, exchanges try their best to serve a global population.

They also strive to bring in the new wave of crypto enthusiasts as well as Wall Street traders and institutional investors. The crypto market is relatively new to everyone. So education about spot markets and cryptocurrency exchanges is key to investing safely. Learn more on the HedgeTrade blog and arm yourself with knowledge:

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