Finance

# How do you calculate spot exchange rate?

When you ask what is a spot exchange it means exchange or trade of two assets on the basis of real-time exchange or trade price

In other words, in spot trading, a buyer and a seller decide to trade two assets with one another on the basis of the “immediate” exchange price. Now, what is a spot exchange rate? Well, it’s the “real-time” or “current” rate at which a buyer and a seller agree to conduct the trade or exchange. .  It’s just the exact opposite of forward trading. In forward trading, the rate of trading or exchange is decided based on a future price.

It must be mentioned here that the exchange price for the same pair of assets will vary from time to time- and especially so in a wildly volatile market like crypto.

Spot trading usually involves upfront payment. In the traditional financial market it generally takes 3 business days (Trade day and 2 additional days) to get the asset. However, the crypto market works 24/7 and hence crypto spot traders usually enjoy immediate receipt of the asset.

Spot trading traders generally don’t go for HODLing. They mostly opt for day trading where they conduct trades within one single day. Sometimes, that can also execute trades multiple times over a single day. However, the profits gained from spot trading are usually lower than those gained from HODLing. In other words, spot traders generally focus on short-term profits.

Calculating spot exchange rate

When you want to know what is a spot exchange rate, you must understand the basic calculation of the rate.

Below is an example and a brief on calculating spot exchange rate when you are asking what is a spot exchange rate.

The example-

Let’s say, Tom has got around 1,000 USDT that he wants to spot trade for BTC at the rate of \$20,000/BTC. Once he signs up with an exchange for spot trading, the exchange matches him with Harry who wants to sell BTC for USDT. The trade will take place immediately and Harry will receive the 1000 USDT- while Tom will receive the equivalent amount of BTC at the exchange rate (\$20,000) mentioned above.

Calculating the exchange rate

In spot trading, the exchange rate applies to the cost of a crypto that would be traded in respect to another crypto chosen for the trade. Now, you have to be careful about the particular “order” in which the crypto pairs will be listed for trading when you are asking what is a spot exchange rate.

For example, if the pair is BTC/USDT, the exchange rate will be different from spot trading on USDT/BTC. The first mentioned asset will be equivalent to 1 unit. The rate of the second  one refers to the amount of the second asset required to purchase 1 unit of the first asset. This is the basic formula based on which you will be able to chart down the conversion requirement of your trade.

Where do you conduct spot trading?

Crypto exchanges

So, what is a spot exchange? Well, very simply, these are the trading platforms that allow traders to engage in spot trading.

Crypto exchanges are the most popular place for conducting spot trading with crypto. Both centralized and decentralized crypto exchanges welcome traders for spot trading.

In centralized exchanges, the process is usually safer as the CEXs take rigorous steps to ward off imposters. But, a centralized exchange will control custody of trader’s crypto assets. If you are comfortable with that, you can always go for centralized exchanges. However, if you are not comfortable with a trading platform acting as the custodian of your assets, you can sign up with a decentralized exchange. Decentralized exchanges follow a more of a relaxed environment and do not control custody of traders’ assets.

OTC platforms

Over-the-Counter aka OTC platforms also conduct spot trading for crypto traders. These are mostly brokerage firms that serve as market makers. Now, this is to note here that the exchange rate might vary from one OTC platform to another. It’s because, in OTC spot trading, the price will be decided by the broker. However, one of the biggest advantages of OTC spot trading is that it costs much less than executing spot trading on a crypto exchange, especially a CEX.

P2P platforms

In P2P platforms, spot traders trade directly with one another over a decentralized network. Now, P2P trading might sound similar to DEX trading- and they do bear similarities- but they aren’t the same. In a DEX, the trade is being conducted anonymously. But, in a P2P platform, the buyer and seller interact directly with one another to conduct the trader. In a P2P environment, traders enjoy better control over different trading activities, including selection of buyers and/or sellers, pricing, time of settlement, mode of payment, and so on.