How spot trading works
The mechanics vary by venue:
- Centralized exchange (CEX) — order-book matching. Place a limit order at a price or a market order to hit the best available bid/ask. Settlement is instant within the exchange; withdrawal to a self-custody wallet takes minutes to hours.
- Decentralized exchange (DEX) — either order-book (dYdX v3, Serum historically) or automated-market-maker (Uniswap, Curve, PancakeSwap). AMMs price trades against a constant-product formula — no counterparty, just a pool.
Spot trades are the building block of almost everything else: fiat on-ramps, OTC desks, and cross-CEX arbitrage all happen in spot markets. Derivatives prices are ultimately anchored to spot via funding rates and index feeds.
Spot vs. derivatives
Why choose spot over perpetual futures?
- Custody — spot BTC can be withdrawn to a hardware wallet; a perp position is a claim on an exchange’s balance sheet.
- No liquidation — a spot position can drop 99% without forced selling. Perps force-close long before that.
- Tax and accounting clarity — spot trades are more straightforward for most jurisdictions; derivatives are treated differently in many tax regimes.
- Staking, restaking, DeFi utility — spot ETH can be staked, used as collateral, bridged, lent, or put into a liquidity pool. A perp position can only sit on the exchange.
Risks and considerations
The core spot risks: (1) exchange insolvency — the FTX collapse is the reference case; funds on an exchange you don’t control are a loan to that exchange, (2) withdrawal pauses — even solvent exchanges can freeze withdrawals during regulatory actions or technical incidents, (3) slippage on large orders in low-liquidity markets, and (4) wash trading and fake volume on smaller venues that makes order-book depth look healthier than it is. For long-term holdings, move assets off exchanges to self-custody wallets once the trade is done. For active trading, prefer deep-liquidity venues (Binance, Coinbase, OKX) over the long tail.